Life and pensions firms suffered further shares misery after the City watchdog confirmed plans for an inquiry into 30 million financial policies sold between the 1970s and 2000 amid fears over "rip off" charges and sub-standard service.
Players in the sector were sent sharply lower after the Financial Conduct Authority (FCA) said it would launch the probe into the treatment of customers in closed accounts worth £150 billion this summer.
The wider FTSE-100 Index closed 27.3 points higher at 6615.6 as insurance stocks pulled back some of their losses after the FCA clarified it was not looking to ban all exit penalties on policies sold over the 30-year period.
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But with the focus of the probe settling on so-called "zombie" funds, which are shut to new customers, the major closed fund consolidators remained heavily in the red, with Friends Life insurer Resolution closing 7% down in the FTSE 100 and Phoenix Group plunging 12% in the FTSE-250.
Sterling held firm as economic figures confirmed the UK economy grew by 0.7% in the final quarter of last year, despite concerns over a larger-than-expected current account deficit. The pound remained at 1.66 US dollars and 1.21 euros.
For insurers, the latest blow comes after a torrid past two weeks following the Chancellor's Budget move to give pensioners the freedom to draw down as much or as little of their pension pot as they want, removing the need to buy an annuity.
David Madden, market analyst at IG, said: "It has been one disaster after another this year for insurance stocks, between the flooding, changes to pensions and now an investigation into millions of insurance policies stretching back as far as the 1970s; the sector has gone from bad to worse."
Resolution, which was set up in 2008 to consolidate the life insurance industry, lost 15% of its value at one stage, but later closed 22.7p lower at 296.3p.
Phoenix, which has five million policyholders and is the UK's largest consolidator of closed life assurance funds, tumbled more than 20% earlier in the session before closing 85p down at 652p.
The latest blow to confidence was felt across the insurance sector, with Legal & General off 7.4p to 205p, Aviva down 13.3p to 470.2p and Prudential down 34.5p to 1280.5p.
A recovery for mining stocks helped offset the weakness among insurers, with commodities trader Glencore Xstrata leading the sector's gains up 6.2p to 313.3p.
The biggest FTSE 100 risers were Smith & Nephew up 21.5p to 921.5p, Standard Chartered ahead 27.5p to 1259.5p, G4S 5.1p higher at 237.9p and Unilever 52p stronger at 2557p.
The biggest FTSE 100 fallers were Resolution off 22.7p to 296.3p, Legal & General off 7.4p to 205p, Aviva 13.3p weaker at 470.2p and Prudential 34.5p lower at 1280.5p.