* Banks, insurers slide as sentiment dips
* Energy stocks, miners slide on soft commodity prices
* Defence stocks gain on U.S. defence budget
By Simon Falush
LONDON, April 7 (Reuters) - Renewed caution on the outlook
for the financial system drove sharp losses in banks by midday
on Tuesday, while commodity stocks also weighed on Britain's top
share index.
By 1045 GMT the FTSE 100 <> had fallen 73.22 points, or
1.8 percent, to 3,920.32, after sliding 36.13 points or 0.9
percent on Monday. The index is down 11.3 percent this year, but
has jumped 13.7 percent from its low set in March.
The UK banking sector <.FTNMX8350> lost 4.4 percent but it
is still up over 60 percent since its trough last month.
British manufacturing output fell less than expected in
February but still saw the 12th straight month of declines and
analysts said investors were taking a cautious stance ahead of
the U.S. earnings season which kicks off later on Tuesday with
Alcoa <AA.N>.
"Banks have gained very strongly and they are now giving up
some of those gains as investors book profits," said Rob
Griffiths, equity strategist at Cazenove.
"They are waiting to see how the earnings season will go to
determine where we go next."
Lloyds Banking Group <LLOY.L> was the heaviest faller among
blue-chips, down 7.2 percent after Credit Suisse downgraded it
to 'underperform' from 'neutral'.
Standard Chartered <STAN.L> slid 6 percent after UBS
downgraded it to 'sell' from 'neutral' after it said an 80
percent rise in the stock in a month had left the bank "ahead of
itself".
HSBC <HSBA.L>, Royal Bank of Scotland <RBS.L> and Barclays
<BARC.L> fell between 3.4 and 6.4 percent.
"The banks dragged the markets lower last year," Peter
Dixon, economist at Commerzbank said. "(How the wider market
performs) will depend on banks, and they won't do well going
forward as all the good news is priced in."
Gloom in the financial sector also weighed on insurers,
with Legal & General <LGEN.L> down 3.7 percent, Aviva <AV.L>
down 1.9 percent and Prudential <PRU.L> slipping 3.3 percent.
ENERGY SAPPED
Energy companies retreated from early gains as crude turned
tail to slide back towards $50 per barrel <CLc1>.
BP <BP.L>, Royal Dutch Shell <RDSa.L>, BG Group <BG.L>,
Tullow Oil <TLW.L> and Cairn Energy <CNE.L> slid between 1.2 and
3 percent.
Miners also reversed early gains as metal prices retreated.
Rio Tinto <RIO.L>, Kazakhmys <KAZ.L>, Eurasian Natural Resources
<ENRC.L>, and BHP Billiton <BLT.L> and Lonmin <LMI.L> fell
between 2.7 and 5.6 percent.
Defence companies benefited as traders said a U.S. overhaul
of the world's most powerful military arsenal would not lead to
spending cuts as significant as some in the sector had feared
[].
BAE Systems <BAES.L> topped the FTSE 100 leaderboard, adding
7.6 percent, with analysts saying it is benefitting as the
budget unveiled bigger funding for the F-35 joint strike fighter
jet, which it part builds, while peer Cobham <COB.L> added 1.11
percent
Currency moves reflected the increased risk aversion, with
the safe haven yen <JPY=> and dollar <EUR=> gaining sharply.
Food producers, seen as a relatively safe bet in falling
markets were higher. Cadbury <CBRY.L>, Uniliver <ULVR.L and
Associated British Foods <ABF.L> added 0.5 to 1.9 percent.
(Reporting by Simon Falush; Editing by Jon Loades-Carter)
