Barclays shares fell to their lowest level since late 2012 after a fraud lawsuit was laid against the bank by the New York attorney general. Standard Chartered was also down after the Asia-facing bank warned that its half-year operating profits will be 20 per cent lower than a year earlier.
But despite these falls the FTSE 100 Index managed to steady after its 53-point fall on Wednesday, edging up 1.5 points to 6735.1.
Sterling returned to form on relief that actions from the Bank of England aimed at taking some of the heat out of the housing market were not as aggressive as some investors had expected.
The Financial Policy Committee said loans of 4.5 times a borrower's income or higher should account for no more than 15 per cent of new mortgages issued by lenders, while they should also apply a new interest rate stress test.
Sterling rallied back above the 1.70 barrier against the US dollar and also improved to 1.25 versus the euro.
The relief was shared by investors in housebuilding stocks as Persimmon rose 5 per cent or 60p to 1259p and Barratt Developments lifted 16.6p to 362.9p.
In the FTSE 250, Redrow was nearly seven per cent higher, up 16.4p to 267.6p, while estate agency group Foxtons was also nearly seven per cent or 17.3p stronger at 283p.
London Stock Exchange was at the top of the blue-chip risers board after it announced it is buying Seattle-based asset management business Frank Russell for £1.6 billion.
The deal, which includes the closely watched Russell 2000 small-cap stock index in the US, triggered a rise of 6per cent, or 114p to 1984p, in LSE shares.
The fallers board was led by Barclays after investors were spooked by the claims that it misled large institutional investors and other clients by falsely telling them it was taking measures to protect them from predatory high-frequency traders. Barclays, which said it is co-operating with the attorney general on the investigation, fell by 15p to 215p.
Standard Chartered, which has been hurt by tougher regulations and the impact of low volatility on its financial markets business, was 54.5p to 1203p.
Both companies said they were in good shape ahead of the merger, which is due to complete by the end of September.
The biggest risers on the FTSE 100 were London Stock Exchange up 114p at 1984p, Persimmon up 60p at 1259p, Barratt Developments up 16.6p at 362.9p and ITV up 6.8p at 176.3p.
The biggest fallers on the FTSE 100 were Barclays down 15p at 215p, Standard Chartered down 54.5p at 1203p, Reckitt Benckiser down 95p at 5030p and HSBC down 7p at 594.6p.