FTSE dips as banks fall after KDB ditches Lehman

* FTSE 100 down 0.5 pct

* Banks weak on worries over Lehman situation

* Retailers Next, Kesa Electricals updates disappoint

* Oils rally with crude prices after OPEC cut

By Jon Hopkins

LONDON, Sept 10 (Reuters) - Britain's top share index shed 0.5 percent on Wednesday as banks fell on worries over the fate of Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) after Korea Development Bank (KDB) [KDB.UL] said talks with the U.S. bank have ended for now.

By 0806 GMT, the FTSE 100 .FTSE was down 29.1 points at 5,386.5, having closed 0.6 percent lower.

U.S. stocks plunged overnight, driving the benchmark S&P 500 .SPX to its biggest one-day fall in 18 months, as concern about Lehman's ability to raise much-needed capital reignited fears about the financial sector. [ID:nSP305870]

Lehman shares sank as much as 46 percent, and the No.4 U.S. investment bank brought forward the release of "key strategic initiatives" and quarterly results by a week to around 1130 GMT.

HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz), Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) lost 2-3 percent as the uncertainties in the sector created by the Lehman situation added concerns around this week's U.S. bailout of Fannie Mae and Freddie Mac and to global economic worries.

Adding to the gloom, Old Mutual OLM.L shed 5.6 percent on news its chief executive Jim Sutcliffe is to resign and the insurer is to take writedowns of around 135 million pounds in the value of preferred stock of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz). [ID:nWLA9349].

Sector peer RSA Insurance (RSA.L: Quote, Profile, Research, Stock Buzz) fell 3.9 percent in reaction to a pair of broker downgrades, with JPMorgan cutting its stance to "underweight" from "overweight" and RBS reducing its rating to "hold" from "buy".

Broker comment also weighed on pubs operator Enterprise Inns (ETI.L: Quote, Profile, Research, Stock Buzz), down 5 percent as Morgan Stanley cut its rating to "underweight" from "equal-weight" in a corporate sector review.

Enterprise Inns' demotion from the FTSE 100 index is expected to be confirmed after the latest quarterly indexes review, due after the close on Wednesday, with miner Ferrexpo (FXPO.L: Quote, Profile, Research, Stock Buzz) and broadcaster ITV (ITV.L: Quote, Profile, Research, Stock Buzz) also both likely to lose their blue-chip status.

Retail issues were the other main drag on the market sentiment after trading news in the sector disappointed.

Next (NXT.L: Quote, Profile, Research, Stock Buzz) shed 3 percent after the clothing retailer reported a 12 percent fall in first half pretax profit with its CEO saying trading remains very volatile [ID:nWLA9327].

And mid-cap Kesa Electricals (KESA.L: Quote, Profile, Research, Stock Buzz) dropped 10 percent after reporting weaker-than-expected first-quarter sales. [ID:nWLA9356].

ENERGY STOCKS RALLY Energy issues, however, provided a floor for the FTSE 100 as the sector rallied in tandem with U.S. oil futures CLc1 which jumped over $1 a barrel after OPEC agreed a small but unexpected production cut. [ID:nSP56161].

Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz), Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch shell (RDSa.L: Quote, Profile, Research, Stock Buzz) gained between 0.8 and 1.8 percent, while oil services firms Petrofac (PFC.L: Quote, Profile, Research, Stock Buzz) and John Wood Group (WG.L: Quote, Profile, Research, Stock Buzz) added 2 percent and 1 percent, respectively.

On the FTSE 250 .FTMC housebuilders enjoyed a recovery also after results from Barratt Developments (BDEV.L: Quote, Profile, Research, Stock Buzz) proved no worse than feared. [ID:nLA38157].

Shares in Barratt added 5.8 percent, with Tayor Wimpey (TW.L: Quote, Profile, Research, Stock Buzz), Bovis Homes BVH.L and Persimmon (PSN.L: Quote, Profile, Research, Stock Buzz) up between 5.6 and 1.3 percent. (Editing by Louise Ireland)