The blue-chip FTSE 100 index ended 0.2% lower, extending losses for the third straight session, weighed by weakness in financials including HSBC, Prudential and Lloyds Group.
Morrisons declined 3.8%, its worst single-day fall since September last year, after U.S. private equity firm CD&R won the auction for Britain's fourth-largest supermarket with a 7 billion pound ($9.5 billion) bid, only marginally above its 285 pence a share offer, already recommended in August.
Peer Sainsbury's rose 3.3% on hopes that SoftBank's Fortress Investment could turn its attention to the company after losing the bidding war for Morrisons.
The domestically focussed mid-cap index fell 1.3%, closing at over a two-month low, led by declines in consumer discretionary stocks.
The FTSE 100 is up nearly 8.5% so far this year on accommodative central bank policies and re-opening optimism.
The index is, however, 2.3% below the highest point hit this year as inflation risks and signs of slowing local and global economic growth have weighed on investor sentiment.
"Inflation continues to underpin market sentiment, with fears over a protracted period of above-target prices bringing expectations of a dramatic rerate in monetary policy expectations," Joshua Mahony, senior analyst at IG Group, said.
"Investors are growing increasingly fearful that the November and December period is characterised by a lack of supply and higher prices."
Limiting further losses were heavyweights BP and Royal Dutch Shell, up 2.1% and 2.2% respectively, tracking a jump in crude prices. [O/R]
Among other stocks, AstraZeneca rose 0.8% after its breast cancer drug, Enhertu, received a breakthrough therapy designation.
Online trading platform Plus500 rose 1.8% after raising its forecast for the second time in less than three months.
Graphic: Banks shrug off higher yields
(Reporting by Bansari Mayur Kamdar, Shashank Nayar and Amal S; Editing by Sriraj Kalluvila and Andrew Heavens)
By Shashank Nayar and Bansari Mayur Kamdar