FTSE drops 1 pct, Bear Stearns fuels banking fears

By Rebekah Curtis

LONDON, March 14 (Reuters) - Britain's leading share index fell 1 percent on Friday, as banks on both sides of the Atlantic slid on fears that emergency financing for U.S. bank Bear Stearns BSC.N could portend further turmoil for the sector.

The FTSE 100 .FTSE leading share index ended down 1.1 percent, or 60.7 points, at 5,631.7, having fallen nearly 13 percent this year on investor fears a recession will likely hit a struggling U.S. economy.

"I would not mind betting that we will test 5,300 once again. I think there's enough bad news to come out to cause a 300-point drop in the index, short term," said Edward Menashy, an economist at Charles Stanley.

Banks all fell and together swiped nearly 25 points off the FTSE 100. HBOS (HBOS.L: Quote, Profile, Research) dropped 6 percent, Barclays (BARC.L: Quote, Profile, Research) lost 3.9 percent and Royal Bank of Scotland (RBS.L: Quote, Profile, Research) 2.5 percent.

U.S. and European shares fell sharply on news Bear Stearns, the fifth-largest U.S. investment bank, had secured emergency financing from JPMorgan Chase & Co and the Federal Reserve Bank of New York for up to 28 days after its cash position had unravelled in the past 24 hours.

The Bear Stearns news knocked the dollar below 100 yen for the second straight day, and to a record low against the euro.

U.S. interest rate futures showed a growing probability the Federal Reserve would lower its benchmark short-term U.S. target rate by 100 basis points next week to revive the economy.

"Sentiment is obviously very negative. No one can be immune to day after day after day of falling prices, it does destroy your confidence," Menashy added.