* FTSE 100 drops 7.2 percent
* Commodity stocks slump on mounting recession fears
* Banks fall led by HSBC, StanChart (For more on the financial turmoil, click on [nCRISIS])
By Jon Hopkins
LONDON, Oct 15 (Reuters) - Britain's top share index lost 7.2 percent on Wednesday, ending a two-day rally, as commodity stocks slumped amid growing fears of global recession.
The FTSE 100 .FTSE ended down 314.6 points at 4,079.6, erasing a big chunk of the near 12 percent rebound seen in the previous two sessions after plummeting 21 percent last week, its second worst weekly fall on record.
"It's all or nothing with the FTSE at the moment, with yet another large one-day movement," said Tim Hughes, Head of Sales Trading at IG Index.
"The comedown after the euphoria of the multi-billion pound bail-outs earlier this week seemed inevitable, although a sharp rise in the latest UK unemployment figures hasn't helped matters," he added.
Miners were the biggest losers, as base metal prices fell and after Rio Tinto (RIO.L) warned of slowing Chinese demand for commodities and signalled a possible delay in plans to sell $10 billion in assets.
Rio Tinto shares lost 16.6 percent, while Eurasian Natural Resources ENRC.L dropped 25.2 percent, Kazakhmys (KAZ.L) shed 22.3 percent, Anglo American (AAL.L) slumped 20.1 percent, and Xstrata XTA.L sank 19.6 percent.
Weaker oil prices weighed on heavyweight energy stocks, with BP (BP.L), Royal Dutch Shell (RDSa.L), BG Group BG.L and Cairn Energy (CNE.L) dropping between 6.8 and 12.2 percent as crude CLc1 shed another $3 a barrel.
Lloyds TSB (LLOY.L) ended down 0.7 percent having seen gains earlier on newspaper reports the government was considering a U-turn to allow dividend payments to shareholders while still taking advantage of its 37 billion pounds bank bailout scheme.
Asked if talks were taking place, a Treasury spokesman said: "The details were set out clearly by both the government and the individual banks on Monday."
HBOS HBOS.L, which Lloyds TSB is taking over, was one of only two FTSE 100 risers, up 0.5 percent, with tour operator Thomas Cook (TCG.L) the other, up 1.2 percent.
Insurers fell after The Times said the Financial Services Authority had stepped up its scrutiny of leading life assurers amid concerns that crumbling investment markets were putting their solvency levels under pressure.
Negative sector comment from Deutsche Bank also weighed, with the broker cutting price targets and earnings estimates and highlighting possible dividend cuts.
Old Mutual (OML.L), Prudential (PRU.L), Aviva (AV.L), Friends Provident FP.L and Standard Life SL.L fell between 8.4 and 18.1 percent. Friends Provident also traded lower as new buyers no longer qualified for its next dividend.
Worries about a deeper recession mounted as British unemployment figures showed their biggest rise in 17 years in the three months to August, taking the jobless rate to its highest level in eight years. [ID:nLF22414]
Across the Atlantic, blue-chip stocks .DJI dropped 3.5 percent Wednesday as recession fears intensified after U.S. retail sales in September recorded their biggest monthly drop in more than three years.
Among UK mid caps, broker comment coupled with recession fears had an influence on two engineering groups.
Ceramic materials firm Cookson CKSN.L shed 18.9 percent as Goldman Sachs cut its rating to "neutral" from "buy" and chopped its target price to 350 pence from 819.
Industrial engineer Charter CHTR.L lost 19.5 percent as Panmure Gordon downgraded its stance to "hold" from "buy" and slashed its target price to 615 pence from 1,160.
"Today is one of those days that is indicating we are not at the end of a bear market," said Angus Campbell, head of sales at Capital Spreads.
"There are still recessionary fears. There are still fears about the global outlook for equities. You would get big, big rises after big, big falls, but the big, big rises won't be able to cancel out all the falls that we see for quite a while."