* Blue-chip FTSE 100 index falls 0.6 percent
* Miners, banks feature among top decliners
* Babcock International slips on rights issue
By Atul Prakash
LONDON, March 27 (Reuters) - Britain's top stock index fell on Thursday, with miners leading the retreat on lingering concerns their earnings could be hurt by weaker metals prices following a growth slowdown in China and improving supplies.
Banking shares also lost some ground after the Federal Reserve blocked the U.S. units of Royal Bank of Scotland and HSBC from paying higher dividends or buying back their own shares, citing weaknesses in their capital planning.
The two heavyweight sectors took the most points off the blue-chip FTSE 100 index, which fell 0.6 percent to 6,567.01 points by 1208 GMT and is down 3.4 percent this month.
The UK mining index dropped 1.5 percent, the top sectoral decliner, and took the total losses this month to nearly six percent on concerns that earnings of mining companies might disappoint in coming quarters due to pressure on prices of major metals.
"The outlook for commodity prices has changed quite substantially as the supercycle that we saw in China is coming to an end," Henk Potts, strategist at Barclays Wealth, said.
"There has been a huge amount of investment in the mining sector during the boom years and that supply is just about to come through at a time when demand has been slowing down."
Prices of aluminum, nickel and gold fell 0.3 to 1.1 percent, putting pressure on precious metals miner Fresnillo, down 3.7 percent, and on Randgold Resources, down 2.6 percent.
Rio Tinto fell 1.8 percent, while BHP Billiton was down 0.7 percent.
Financials were the second-biggest drag on the market after miners, with the UK banking index down 0.6 percent.
Royal Bank of Scotland and HSBC were down 1.6 percent and 0.7 percent respectively following the Fed's rejection of their request for higher dividends.
Foreign banks will have to wall off their U.S. units and meet tougher capital requirements under the Fed rules.
However, some traders said discussions about the U.S. stress tests were not over, so the banks could get off more lightly.
"It's a watching brief for UK banks ... but with any further downside they're likely to attract buyers," said Matt Basi, head of sales trading at CMC Markets.
"All of these things are done by negotiation, so it's not a case of HSBC and RBS making a proposal, the Fed saying no, and that being the end of it. It's a back-and-forth process, and we expect there to be a resolution at some stage in the near-term."
The sector also came into focus after the Bank of England urged banks to consider the risk of future spikes in interest rates when approving mortgages, and prepared tools to rein back potentially dangerous lending.
Among individual sharp movers, UK defence support and engineering services group Babcock International fell 5.9 percent to the bottom of the FTSE 100 index.
It said on Thursday it has agreed to acquire helicopter transport services firm Avincis for 920 million pounds ($1.5 billion) plus debt, funding the deal with a 1.1 billion-pound rights issue. (Additional reporting by Tricia Wright; Editing by Sophie Hares)