* FTSE down 1.6 percent
* Commods fall on downbeat China services data
* Banks down on Moody's warning, U.S. subprime risks
By David Brett
LONDON, Sept 5 (Reuters) - Miners led Britain's top share index sharply lower on Monday after downbeat data from China, on the back of Friday's poor U.S. jobs figures, heightened concerns the economy may fall into recession.
The UK's benchmark index was down 84.59 points or 1.6 percent at 5,207.44 by 0751 GMT, extending the previous session's 2.3 percent sell-off and tracking sharp declines overnight in Asia and on Friday on Wall Street.
Investors still reeling from Friday's disappointing U.S. non-farm payrolls, which showed no jobs growth in the world's biggest economy in August, faced more pain as a survey showed China's fledgling services sector grew in August at the lowest pace on record.
That further darkened the outlook for commodities, prompting a flight from risk out of the mining sector , which relies heavily on demand from the world's hungriest consumer of commodities.
Antofagasta and Kazakhmys were the top fallers among the miners, shedding 3.5 and 3.4 percent, respectively.
Banks were also hit with Barclays , Royal Bank of Scotland and Lloyds Banking Group up to 5.4 percent lower as Credit rating agency Moody's said it was still reviewing several leading British banks for a possible downgrade.
Meanwhile, newspaper reports said UK banks could be forced to pay out more than 5 billion pounds ($8.1 billion) in damages related to the subprime mortgage scandal in the U.S.
London's blue chip index pared gains made at the start of last week when investors had hoped that the poor economic data, particularly from the U.S., would spell the start of a fresh round of economic stimulus in order to boost flagging growth.
"The reason for the upturn in sentiment was seemingly based on the view that the U.S. was about to switch the quantitative easing life support back on," said Lothar Mentel, chief investment officer at Octopus Investments, which manages $4 billion.
That hope, however, has now turned to fear as the downbeat economic data shows no sign of abating and investors are unconvinced policymakers have anything left in their arsenal to fire growth in the global economy.
"Rather than relying on more of the same in terms of QE, we'd prefer to see something more encouraging and positive come from President Obama in his post-Labour day address," added Mentel.
U.S. President Barack Obama, in a speech set for Thursday, will unveil a jobs program he hopes will provide "meaningful" tax relief and help the nation's long-term unemployed, a top aide told Reuters Insider.
No U.S. data will be released on Monday, with U.S. equity markets closed for the Labor Day public holiday. On the domestic data front, August's Markit/CIPS services PMI will be released at 0828 GMT, with a reading of 54.0 forecast, down from 55.4 in July.
BROKERS CAUTIOUS
In a bleak assessment of current market conditions and the tough outlook facing corporates, UBS initiated coverage on global equities with an "underweight" stance.
"Given the deterioration in economic and policy fundamentals, we find it difficult to see why equity markets should trade at more elevated levels than their summer lows," UBS said in a note.
The broker said that in addition to the challenging macro backdrop, investors would have to deal with falling earnings expectations and therefore it retained its preference for "quality" stocks.
The broker moved to an "underweight" rating in financials and materials and moved consumer staples to "neutral". It kept its "overweight" rating on tech, healthcare, and telcos.
Credit Suisse too opted for safety first saying its strategists' sector allocation tended to reflect protection from the visible risks.
The safety first option taken by investors has seen bonds in Germany and the U.S. well supported in the last couple of days -- on the likelihood that the Federal Reserve would make new bond purchases. Gold has crept back towards its record highs around the $1900 mark.
That has provided support for Randgold Resources , the only FTSE riser, up 0.2 percent as investors bought the gold miner as a proxy for the precious metal. ($1 = 0.617 British Pounds) (Editing by Jon Loades-Carter)
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