Britain's main share index <.FTSE> ended 0.5 percent lower, having spent much of the session in positive territory, while euro zone stocks <.STOXXE> fell 1.7 percent.
British banks <.FTNMX8350>, a sector which would benefit from higher rates, jumped 2.7 percent to a four-month high after the U.S. regulator approved higher dividends and buybacks, sending a ripple effect across financial stocks worldwide.
The Fed approved plans from the 34 largest U.S. banks, including U.S. units of HSBC and Deutsche Bank, to use extra capital for stock buybacks and other purposes beyond a cushion against possible catastrophe.
HSBC (>> HSBC Holdings) was up more than 4 percent to a near four-year high, also boosted by a Morgan Stanley upgrade to 'overweight'. Analysts said they saw capital return rising up the agenda for the bank, with around $45 billion of surplus by 2019.
"Our work suggests HSBC will be in the top quartile of EU banks for cash returns over the next three years," said Morgan Stanley analysts.
"HSBC's weighting towards Asia sets it apart from everything else that's listed here. I can see why there's potential for a split where people start looking at HSBC instead of Lloyds, who are far more exposed to Brexit risks," said Gareth Burchell, partner at Shard Capital.
"HSBC pays a very high dividend which is also attractive."
Miners Rio Tinto (>> Rio Tinto), Glencore (>> Glencore), Antofagasta (>> Antofagasta) and Anglo American (>> Anglo American) also lent support as copper and gold prices climbed against the weaker dollar.
Shares in broadcaster Sky (>> Sky) rose 3.3 percent after the UK government said that it intended to subject Rupert Murdoch's takeover of the group to an in-depth investigation after finding the $15 billion deal risked giving the media mogul too much power over the news agenda.
Sky's shares rose on hopes a full investigation could still be averted by concessions over its 24-hour TV news channel.
While the sell-off was broad-based, consumer staples were the biggest weight, with British American Tobacco (>> British American Tobacco), Unilever (>> Unilever), Reckitt Benckiser (>> Reckitt Benckiser) and Diageo (>> Diageo) coming under pressure following more hawkish signals from central banks, including the Bank of England on Wednesday.
The dividends of such interest-rate sensitive stocks look less attractive when rates are expected to rise.
Mid-caps <.FTMC> also saw some robust company moves, with hefty losses from JD Sports sending the index down 0.7 percent.
Packaging company DS Smith (>> DS Smith) jumped 8.4 percent, hitting an all-time high after reporting upbeat full-year results and a planned $920 million acquisition of 80 percent of U.S. corrugated packaging firm Interstate Resources.
JD Sports (>> JD Sports Fashion PLC) sank 8.5 percent, its worst day in a year, after a trading update showed sales growth in line with expectations.
(Reporting by Kit Rees and Helen Reid; editing by John Stonestreet)
By Helen Reid and Kit Rees
Stocks treated in this article : Unilever (NL)
, British American Tobacco
, Anglo American
, Reckitt Benckiser
, DS Smith
, Rio Tinto
, HSBC Holdings
, JD Sports Fashion PLC