SHARES in Britain’s banks dragged the London market lower today as fears over Italy’s finances inflamed concerns over European debt contagion.

Speculation that Italy and even Spain could follow in the footsteps of Greece and Ireland and require an EU-funded bailout caused investors to flee risky assets.

The FTSE 100 Index tumbled 91 points to 5837.3, though it was down 120 points at one stage, with jitters over the exposure of banks to sovereign debts causing Lloyds to fall by 0.8p to 44p, while Barclays lost 6.1p at 227.7p and Royal Bank of Scotland dipped 0.3p at 35.4p.

Meanwhile, the Dax in Germany and the CAC 40 in France fell more than 2%.

Aviva, which generated sales of more than £1 billion from operations in Italy and Spain in the first three months of this year, dropped 8.6p to 410.49p.

The euro was hit by the debt fears, falling against most major currencies.

Improved cost of living figures, which saw UK inflation drop from 4.5% to 4.2% in June, and weak trade figures raised the prospect of further quantitative easing and in turn depressed sterling, which was down at 1.13 against the euro.

Meanwhile, BSkyB fell 9.5p to 706p after the Culture Secretary Jeremy Hunt referred News Corp’s proposed bid for total control of the broadcaster to the Competition Commission - which will delay the move by up to a year.

Brokers Investec and Cannacord Genuity both cut their price targets for BSkyB in light of the most recent developments to 746p from 810p and 760p from 800p respectively.

High street bellwether Marks & Spencer was the only stock to defy the gloom on the FTSE 100 Index ahead of what is expected to be a positive first quarter trading update tomorrow.

The retailer is expected to report a 1.5% increase in like-for-like sales in the 13 weeks to the end of June, up from the 0.1% increase in the previous quarter. Shares were ahead 5.5p at 374.2p.

Outside the top flight, shares in travel group Thomas Cook slumped 28% after it said that full-year profits will be about £60 million lower than expected as a result of the squeeze in consumer spending and turmoil in the Middle East and North Africa.

Shares fell 34.2p to 88.5p, while rival TUI Travel dropped 21.7p to 199.5p, a fall of 10%.