* FTSE 100 down 0.4 pct at close
* Banks weigh as Fed minutes indicate balance sheet shrinkage
* Pearson hit by Exane downgrade, trades ex-div
* Woodford-backed Allied Mind drops below IPO price (Adds detail, updates prices at close)
By Helen Reid and Kit Rees
LONDON, April 6 (Reuters) - British shares dropped on Thursday after minutes of the Federal Reserve's last meeting indicated the bank would shrink its balance sheet later this year.
The FTSE 100 was down 0.4 percent at 7,303.20 points at its close, with financials the biggest drag, taking almost 11 points off the index. U.S. equities had dipped on Wednesday .
"There were two elements in the Fed minutes: the fact that some officials thought equities were overvalued; but the smarter money is looking at the fact balance sheet reduction seems to be indicated towards the end of this year," said Panmure Gordon chief economist Simon French.
Lloyds, which traded ex-div, was among the biggest fallers, down 2.2 percent, while Barclays fell 1 percent.,
Pearson was down 6.7 percent, also ex-div and further weighed by a downgrade from Exane to 'underperform'.
"Structural pressures in U.S. higher education courseware are now well documented in the share price. However, we raise fresh concerns on the sustainability of double-digit growth in Pearson's U.S. virtual schools business," the broker said.
The FTSE 100 was also under pressure from a firmer sterling, as a large number of FTSE constituents are dollar-earning firms. April is the month when UK companies make big dividend payouts, and is one reason why the pound has traditionally risen then.
Real estate was the top European sector, and British Land Company and Land Securities Group were up 1.7 to 2.3 percent. Shares in easyJet were the top gainers, rising 4.2 percent
Intellectual property firm Allied Minds was the biggest mid-cap faller, down 5.4 percent and touching a record low, trading below its IPO price for the first time. This took the shares' year-to-date decline to over 62 percent.
The company, 28 percent owned by Woodford Investment Management, had its worst ever day on Wednesday after cutting funding for seven of its portfolio companies.
Jefferies however raised the stock to 'hold' from 'underperform'.
"Allied Minds' new CEO has taken less than a month to cull the weaker companies in the portfolio," said the broker. "This has happened more quickly and broadly than we expected, but we see this $147 million hit as decisive rather than panicked or precipitated." (Reporting by Kit Rees and Helen Reid; editing by John Stonestreet)