Oct. 24 (Bloomberg) -- U.K. stocks dropped, led by financial and energy companies, as the government reported Britain's economy shrank more than forecast in the third quarter, diminishing the outlook for earnings.

HSBC Holdings Plc, Europe's biggest bank, declined the most since Sept. 11, 2001, after Morgan Stanley cut its share- price estimate for the company by 25 percent. Barclays Plc fell after it was lowered to ``neutral'' from ``buy'' at UBS AG, which said earnings and dividends at the U.K.'s second-biggest bank may be hurt as it raises capital. BG Group Plc led shares of energy producers lower.

The FTSE 100 Index lost 270.39, or 6.6 percent, to a five- year low of 3,817.44 at 9:38 a.m., headed for a 6 percent decline this week. The FTSE All-Share index fell 4.2 percent and Ireland's ISEQ index declined 3.2 percent.

``Corporate earnings aren't looking good,'' said Andreas Nigg, a Zurich-based fund manager at Vontobel Asset Management which oversees $39 billion. ``In previous recessions, analysts' estimates have usually been too optimistic. It looks like this is also the case now.''

Britain's economy shrank in the third quarter, the government said today, as the global financial crisis ravaged industries from banking to construction, evidence that the country is in the grips of its first recession since 1991.

BG Group, a U.K. oil and gas producer declined to comment on a report in the Australian that it will make a full offer for Queensland Gas Co.

Earnings Estimates

Analysts have cut profit forecasts this year as the credit turmoil spread, threatening economic growth. Earnings for companies in Europe's Dow Jones Stoxx 600 Index will decline 4.4 percent in 2008, down from 11 percent growth predicted the start of the year, according to estimates compiled by Bloomberg.

The yen climbed against the dollar as the risk of a global recession prompted investors to slash carry trades, in which they fund purchases of higher-yielding assets with the Japanese currency.

HSBC slid 8.4 percent to 737.25. Morgan Stanley lowered its earnings estimates for HSBC by 3 percent to $1.11 a share for this year and 10 percent to $1.05 for 2009.

``We question how long HSBC shares can continue to tread water in the face of falling earnings and increased pressure on capital,'' Morgan Stanley analysts led by Anil Agarwal wrote in a report today.

`More Difficult'

Barclays fell 4.1 percent to 209.25. ``A more difficult outlook for the U.K. economy has contributed to lower than previously expected top-line growth and higher impairment losses,'' London-based UBS analyst John-Paul Crutchley wrote in a note today. ``3.6 billion pounds of new equity prior to the end of March 2009 will lead to further dilution to earnings per share.''

Barclays is likely to cut its dividend next year as profit declines, Crutchley said, predicting a 2009 dividend of 12 pence and earnings of 24.36 pence a share, reduced from a previous estimate of 43.59 pence.

HBOS Plc, the U.K. bank that agreed to be bought by Lloyds TSB Group Plc, slid 9.3 percent to 66 pence. Aviva Plc, the U.K.'s biggest insurer, declined 8 percent to 253 pence.

BG lost 5 percent to 735. AGL Energy was halted from trading in Australia pending a ``possible material transaction,'' according to an AGL statement, while Queensland Gas also requested a halt for its shares. AGL, Australia's largest power and gas retailer, owns about 25 percent of Queensland Gas.

Oil Delivery

BHP Billiton Ltd., the world's largest mining company slid 1.7 percent to 809 pence. Royal Dutch Shell Plc, Europe's biggest oil company, decreased 5 percent to 1,473.

Copper for delivery in three months slumped for a fifth day, sliding 5.3 percent to $3,825 a metric ton in London. Nickel, lead, zinc and aluminum prices also fell.

Oil for December delivery dropped as much as 96 cents, or 1.4 percent, to $66.88 a barrel on the New York Mercantile Exchange and was at $67.06 a barrel at 2:49 p.m. Singapore time.

The following stocks also gained or fell in the U.K. market. Stock symbols are in parentheses.

U.K. companies:

Just Retirement Plc (JR/ LN) plunged 6 pence, or 15 percent, to 34. The U.K. life insurer for retired workers said first-quarter new business fell 3.8 percent on a ``temporary'' slowdown in home-equity loans.

Henderson Group Plc (HGI LN) slumped 6.5 pence, or 11 percent, to 52 after the U.K. money manager had its recommendation cut to ``underweight'' from ``equal-weight'' at Morgan Stanley.

The downgrade ahead of third-quarter earnings reflects ``risks to retail assets driving negative margin mix shift, and limited cost flex to offset further earnings risk from seed capital losses, shortfall on performance fees, and blockbuster fund reversal,'' analysts including Bruce Hamilton, and Hubert Lam wrote in a research note today.

Hochschild Mining Plc (HOC LN) slid 5.25 pence, or 4.7 percent, to 107.5. Peru's second-largest silver miner will reduce investment in its mines next year as silver prices decline, Gestion reported in its online edition.

National Express Group Plc (NEX LN) lost 35 pence, or 5.7 percent, to 575. The U.K. long-distance coach operator said trading is on track for a strong year.

Bowker said the travel industry is ``not immune to an economic slowdown'' and that National Express is seeing evidence of consumers becoming increasingly focused on securing the best value for money.

Prudential Plc (PRU LN) decreased 26.25 pence, or 8 percent, to 303.75. The U.K.'s second-largest insurer is looking to buy parts of American International Group Inc. beyond the U.S. company's Asian operations, the Financial Times reported, citing an interview with Chief Executive Officer Mark Tucker.

To contact the reporter on this story: Sarah Thompson in London at sthompson17@bloomberg.net.

Last Updated: October 24, 2008 04:56 EDT