* FTSE 100 down 3.1 percent
* Financials woes persist after global markets plunge
* Oil shares down as crude prices fall
By Jon Hopkins
LONDON, Sept 16 (Reuters) - Britain's leading share index
dropped to a three-year low around midday on Tuesday knocked by
more falls in financial stocks a day after Lehman Brothers
<LEH.N> collapsed and as insurer AIG <AIG.N> fought to survive.
At 1111 GMT the FTSE 100 <> was down 161.3 points, or
3.1 percent, at 5,047.3, more than a three-year low, extending
Monday's 3.9 percent drop.
U.S. stock index futures were mixed early on amid hopes the
Federal Reserve would move to relieve some of the intense
pressure on financial markets by sanctioning a quarter point
rate cut later Tuesday. []
In the interbank market, the cost of borrowing overnight
dollar funds surged to over 10 percent, market sources said,
more than five times the Fed's target rate and a sign that
dollar lending between banks had virtually ceased.
The Fed will announce its interest rate decision at 1815
GMT. Fed funds futures showed a 92 percent chance of a 25 basis
point cut.
"After thirty years in the City I've never known it so bad,"
said Mic Mills, trader at ETX Capital. "I didn't think the Fed
would move but now I don't think they have a whole heap of
choice, and I would be surprised if they didn't act."
U.S. insurer AIG, thrown a $20 billion lifeline by New York
state, came under new pressure on Tuesday after ratings agencies
downgraded its debt.
"It's just really, really ugly out there, and if AIG goes
under that would be really scary stuff," Mills said. "If you
start letting the likes of AIG go to the wall you are talking
meltdown".
UK insurers were weak, reflecting AIG's woes, with Admiral
Group <ADM.L>, Legal & General <LGEN.L> and Aviva <AV.L> down
between 3.7 and 5.5 percent.
UK banks were hardest hit for the second successive session
with the sector also nervous ahead of results from Goldman Sachs
<GS.N>.
HBOS <HBOS.L>, Royal Bank of Scotland <RBS.L>, Lloyds TSB
<LLOY.L>, and HSBC <HSBA.L> were down between 6 and 21 percent.
The negative sentiment was exacerbated as three-month Libor
spreads widened to levels not seen since the credit crunch
erupted last August.
Barclays <BARC.L> was 7 percent lower after people familiar
with the matter said it was in talks with Lehman Brothers to buy
its core U.S. broker-dealer businesses, including equity, fixed-
income, M&A advisory and other parts.
OIL EASES
Oil stocks came under pressure as U.S. crude <CLc1> slipped
$2.5 a barrel on economic fears and as investors ditched oil for
safe-haven assets.
BP <BP.L>, Shell <RDSa.L>, BG Group <BG.L> and Cairn Energy
<CNE.L> lost 1.85 to 8.5 percent, with oil services firms Wood
Group <WG.L> and Amec <AMEC.L> down 5.8 and 4.4 percent
respectively.
Tullow Oil <TLW.L> fell 4.9 percent after it said one of its
Indian wells had been plugged and abandoned after a failure to
find hydrocarbons.
Miners tracked weaker metal prices. Xstrata <XTA.L>,
Eurasian Natural Resources <ENRC.L> and Anglo American <AAL.L>,
slid 4.7-5.8 percent.
Among midcap stocks, Michael Page <MPI.L> shed 24.5 percent
after Adecco <ADEN.VX>, the world's largest staffing firm, said
it would not make an offer for its British rival, ending a
takeover struggle that lasted several months. []
But retailer Debenhams rose 7.6 percent after a positive
trading update, with the UK's second-largest department store
chain expecting its full-year net debt position and pretax
profit to meet consensus forecasts.
(Additional reporting by Michael Taylor; Editing by Erica
Billingham)
