The FTSE 100 dropped 44.19 points, or 0.8 percent, to close at 5,624.26, in tandem with most Europen indexes and the euro currency, after a French debt auction, though oversubscribed, failed to allay fears about the debt crisis on the continent.

The single currency slumped to its lowest level against the dollar since September 2010 on tensions ahead of Spanish and Italian auctions next week and signs of weakness in euro zone banks, notably Italy's UniCredit, which slumped for a second day after announcing a massive discount on a rights issue on Wednesday.

The euro is really not helping at the moment; every time it tries to rally, it's getting a slap, and that is really putting a damper on equities, said David Morrison, market strategist at GFT Global.

The FTSE 100 sent a bearish signal as it closed below the full retracement of its mid-December fall, which had been offset by a thin-volume rally over the Christmas period, helped by upbeat data from the United States.

It's risk-on, risk-off trade at the moment, and the big pop up that we had at the beginning of the year was an opportunity for a lot of traders to go short, and now they're taking it, GFT's Morrison said.

Concerns that an escalating debt crisis in the euro zone would drag on the world's economy pushed investors out of cyclical stocks.

Vedanta was the top blue-chip faller, dropping 5.2 percent as miners tracked a decline in copper prices, which depend heavily on economic activity.

At the other end of the FTSE table was Eurasian, which rose 4.6 percent on volume more than two times its 90-day average on news it will receive $1.25 billion from Canada's First Quantum Minerals to end a dispute over a project in the Democratic Republic of Congo.

SMART PHONE CALLS

Chip designer ARM Holdings also outperformed, rising 2.6 percent as UBS placed a short-term buy rating on the group, which it expects to post estimate-beating fourth-quarter results thanks to strong sales of high-end phones.

With solid smart-phone/tablet sales, we expect solid performance through results vs those exposed to weaker-end markets, UBS said.

By contrast, heavily subsidised sales of smart phones in the United States were set to dent the quarterly margins of Verizon, a mobile operator jointly owned by Vodafone Group and Verizon Wireless, the joint venture's chief executive, Fran Shammo, said.

Smartphone sales pressure margins because operators pay higher subsidies to offer advanced phones at discounted prices. In exchange, consumers must sign a two-year contract.