FTSE falls 2.9% after US auto rescue collapse

* Commodities hit by U.S. auto bailout collapse

* Banks fall; HBOS takes 8 bln stg hit

* JPMorgan CEO warns of "terrible" Q4; BoA cuts jobs

By Dominic Lau

LONDON, Dec 12 (Reuters) - Britain's top share index was down 2.9 percent early on Friday, led by commodity stocks and banks after the U.S. Senate failed to reach a deal to bail out automakers and after UK bank HBOS reported a sharp rise in bad debts in the last two months.

By 0832 GMT the FTSE 100 .FTSE was down 126.14 points at 4,262.55. The UK benchmark is down 34 percent for the year on fears of a long and painful global recession.

Senate negotiators failed late on Thursday to reach a compromise deal to bail out the embattled U.S. automakers, effectively killing any chance of congressional action this year.

The news sent prices of crude oil CLc1 and metal lower, and weighed heavily on commodity stocks, making them the main drag of the UK index.

BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), BG Group (BG.L: Quote, Profile, Research, Stock Buzz) and Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) shed between 2.1 and 4 percent.

In the mining sector, BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz), Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz), Antofagasta (ANTO.L: Quote, Profile, Research, Stock Buzz) and Kazakhmys (KAZ.L: Quote, Profile, Research, Stock Buzz) sank 2.9 to 6.5 percent.

"The U.S. economy like the other developed economies is going to contract in 2009 and that makes the first half of 2009 quite problematic for equity markets," said Darren Winder, equity strategist at Cazenove.

"But in the second half of the year we should see signs of more progress. Sentiment is very negative at the moment and there is nothing in the macro level going to shift those sentiments any time soon."

The banking sector was another standout loser on the FTSE 100 after HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) said bad debts and other charges so far this year jumped 66 percent in the last two months alone, to 8 billion pounds ($11.9 billion), [ID:nLC153330] and after the chief executive of JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) said the U.S. bank has had a "terrible" November and December.

Adding to the gloom, Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) said it plans to eliminate 30,000 to 35,000 jobs over three years, as the ecnomic slowdown dampens its business activity. [ID:nN11396219]

HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) sank nearly 11 percent, while Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) were down between 3.3 and 10.9 percent.

With the grim economic news and fears of a weak Christmas sales, retailers also came under severe pressure. Marks & Spencer (MKS.L: Quote, Profile, Research, Stock Buzz) dropped 3.1 percent, fashion retailer Next (NXT.L: Quote, Profile, Research, Stock Buzz) lost 3.8 percent and home improvement retailer Kingfisher (KGF.L: Quote, Profile, Research, Stock Buzz) fell 3.2 percent.

Drugmakers Shire (SHP.L: Quote, Profile, Research, Stock Buzz) and GlaxoSmithKline (GSK.L: Quote, Profile, Research, Stock Buzz), insurer Old Mutual (OML.L: Quote, Profile, Research, Stock Buzz) and aerospace and defence firm Cobham (COB.L: Quote, Profile, Research, Stock Buzz) were the only two gainers on the index. (Editing by Greg Mahlich)