In particular, shares in the UK's biggest mortgage lender HBOS lost 3.6 per cent of their value.
Barclays also lost 1.4 per cent - and smaller lender Bradford and Bingley suffered a 1.2 per cent drop.
Recent "sharp" increases in Libor were blamed by analysts Jonathan Pierce for the sector's poor performance.
Nevertheless, the FTSE 100 had risen 0.1 per cent to 5,998.3 by the early afternoon, Bloomberg reports.
Elsewhere, the FTSE All-Share Index rose 0.2 per cent to 3,060.45.
Strong trading in the oil and gas sector provided upwards pressure, with UK explorer Cairn Energy up 3.9 per cent to 2,942 pence a share.
This was due in part to continuing growth in demand for crude oil in Asia - with the commodity trading for $109 a barrel in New York.