UK stocks : FTSE sheds 0.6 percent

Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, reflecting the growing belief that the country will need a bailout that the euro zone can barely afford, with international lenders having already bailed out Greece, Ireland, and Portugal.

With Spain looking to be on the verge of needing a full bailout, the implications for the euro zone are pretty serious, and investors are right to watch out for risk-sensitive sectors like financials. Overall trading is thin, investors appear to be shunning the market, and with a long hot summer to come, many a finger could be burnt along the way, said Mike Mason, a trader with Sucden Financial Private Clients.

Merged airline group IAG was a big blue chip faller, down 2.2 percent, on concerns over the situation in Spain, with investors worried that hard-pressed Spanish banks will need to sell their big holdings in the firm created by the takeover of Iberia by British Airways.

At the close, the FTSE 100 index was down 34.64 points, or 0.6 percent, at 5,499.23, having slumped 2.1 percent on Monday. Volume was 60 percent of the 90-day daily average.

Banks, which are the most exposed to potential losses in debt-ridden euro zone countries such as Spain, were among the worst-performing stocks.

Miners, which had early on posted a rally after data showed China’s flash factory purchasing managers index had risen in July to its highest level since February, soon saw that enthusiasm fade, with the sector hit by demand fears due to the weak economic backdrop caused by the European economic crisis.

Weak PMI surveys for the euro zone and Germany showing that their private sectors shrank in July added to the macroeconomic fears, while U.S. data also showed manufacturing expanded at its slowest pace since late 2010.

U.S. blue chips were down 0.6 percent by London’s close as investors also digested another batch of earnings.

Commodities trader Glencore was the top blue chip faller in London, down 2.3 percent as Qatar Holding, the second-largest shareholder in the Swiss-based firm’s takeover target Xstrata again added to its stake in the miner.

Qatar took its stake in Xstrata to 11.034 percent with a second purchase of shares since it made an unexpected demand for better terms from the miner’s suitor last month, upping the pressure on Glencore. Xstrata fell 1.80 percent.

Chilean copper miner Antofagasta bucked the weaker market and sector trend, adding 1.8 percent as it appointed Diego Hernandez, the former head of state copper miner Codelco, as its new chief executive.

Croda Crowned

Chemicals firm Croda International was the top FTSE 100 gainer, jumping 6.1 percent as it posted a 6 percent rise in first-half profit, as strong demand in North America offset softness in Europe.

Semiconductor firm ARM Holdings was also in demand, adding 0.7 percent ahead of its second-quarter results due on Wednesday, and with earnings from its key customer Apple expected after the New York close on Tuesday.

Meanwhile, defence contractor Rolls-Royce ahead 0.7 percent, was one of 15 pan-European stocks short-listed by Deutsche Bank for the equity basket of an alternative safe haven portfolio to sovereign debt, especially in Europe, which investors no longer perceive as risk-free.

Other British stocks in the basket included Diageo, Reckitt Benckiser, Royal Dutch Shell, Tesco , and WM.Morrison.

Deutsche Bank said that for its shortlisted companies 2012 estimated EPS growth is expected to exceed that for the Stoxx600 ex-Financials companies, they are more profitable, less levered and offer a higher dividend yield, but that the equity basket trades at a price earnings discount to the ex-financials Stoxx600, which in its view offers a buying opportunity.