FTSE falls 1.7 pct on banks, commods as fears persist

* FTSE 100 falls 1.7 percent

* Financials jitters persist as global markets plummet

* Oil shares hit as crude prices fall $3.4

By Michael Taylor

LONDON, Sept 16 (Reuters) - Britain's blue-chip index fell 1.7 percent on Tuesday, hurt by financial stocks which took the brunt after Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) sought bankruptcy protection and insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) struggled for survival.

At 0801 GMT the FTSE 100 .FTSE had shed 90.7 points at 5,113.5, extending Monday's 3.9 percent fall.

"Very much a continuation of yesterday. It's been one car crash after another," Manus Cranny at MF Global Spreads said.

"Having dealt with the repercussions of no Fed bail out for Lehman, this whole insurance question in regards to AIG is more disconcerting because of the real knock on effects that you potentially have."

U.S. insurer American International Group, thrown a $20 billion lifeline by New York state, came under new pressure on Tuesday after ratings agencies downgraded its debt.

Banks were hit hardest for the second successive session, accounting for over 29 negative index points. Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) and HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) were down between 0.8 and 12.3 percent. Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) was 5.2 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.

In the interbank market, the cost of borrowing overnight dollar funds surged to over 10 percent, market sources said, more than five times the Federal Reserve'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.

"We're almost presuming that there will be 25 basis points from the Fed today...the only potential glimmer of hope is that crude oil is dramatically falling," Cranny said.

"It does just leave the door open that little bit more, for central banks to potentially ease rates a little bit. They have to do that to inject just a smidgen of hope for the market."

OIL EASES

Oil stocks came under pressure as U.S. crude CLc1 slipped to $92 a barrel to seven-month lows on economic fears and as investors ditched oil for safe-haven assets.

BP (BP.L: Quote, Profile, Research, Stock Buzz), Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), BG Group (BG.L: Quote, Profile, Research, Stock Buzz) and Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) lost 1.6 to 9.5 percent.

Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) fell 2.9 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. Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz) and Lonmin (LMI.L: Quote, Profile, Research, Stock Buzz) slid 2.8-5.1 percent.

Japan's Nikkei .N225 fell 5 percent and touched its lowest level in three years on Tuesday. Wall Street had its worst day on Monday since markets reopened after the September 11 attacks.

In midcap stocks, Michael Page (MPI.L: Quote, Profile, Research, Stock Buzz) shed 28.7 percent after Adecco (ADEN.VX: Quote, Profile, Research, Stock Buzz), 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. [ID:nLG396961]

Retailer Carphone Warehouse (CPW.L: Quote, Profile, Research, Stock Buzz) rose 3.5 percent and traders pointed to U.S. Best Buy's (BBY.N: Quote, Profile, Research, Stock Buzz) plans to buy digital music service Napster Inc (NAPS.O: Quote, Profile, Research, Stock Buzz) for $121 million. Carphone has a retail joint venture with Best Buy.

British Airways (BAY.L: Quote, Profile, Research, Stock Buzz) added 4.1 percent and easyJet (EZJ.L: Quote, Profile, Research, Stock Buzz) climbed 6.1 percent, benefitting from falling energy prices.

Utilities also ticked higher, with Centrica (CNA.L: Quote, Profile, Research, Stock Buzz), United Utilities (UU.L: Quote, Profile, Research, Stock Buzz) and Scottish & Southern Energy (SSE.L: Quote, Profile, Research, Stock Buzz) up 0.3-3.7 percent. Traders cited the defensive nature of the sector. (Additional reporting by Simon Falush and Jon Hopkins; editing by Sue Thomas)