* FTSE 100 falls 1.9 percent at midday
* BT slumps after says to miss forecasts
* Banks and telcos fall
By Harpreet Bhal
LONDON, Oct 31 (Reuters) - Britain's blue-chip share index shed 1.9 percent by midday on Friday to end a three-day rally, weighed down by banks and telcommuications firms.
At 1158 GMT, the FTSE 100 was down 80.14 points to 4,211.51. The index has gained 8.3 percent this week and is on track for its best weekly rise since September 2001. However, the benchmark index is still down 13.8 percent in October.
Banks were the biggest losers as fears mounted that a round of interest rate cuts was not enough to stem to flow of worsening corporate earnings and bolster comsumer consumption in major economies.
Barclays dropped 11 percent after investors reacted negatively to its plans to raise $12.1 billion from Qatar, Abu Dhabi and elsewhere to boost capital. The stock briefly made it to the top of the FTSE 100 gainers list in early trade.
HSBC shed 9 percent after Goldman Sachs downgraded Europe's biggest bank to "sell" from "hold". Lloyds TSB and HBOS fell 4 and 3.7 percent respectively.
Jeremy Badstone-Carr, head of private client research at Charles Stanley, said the market may be experiencing profit taking after a "reasonable recovery" in the last few days.
"I think sentiment is improving ... investors might now have a bit of a nibble at equity markets," he said.
BT Group was the top loser on the index, plunging nearly 22 percent after the telecoms firm warned it might miss earnings forecasts for the second quarter due to poor performance at its Global Services Unit, prompting the resignation of the unit's boss.
Oil and gas producers also took a beating after crude oil prices slipped to $63.8 a barrel. BP, Royal Dutch Shell and Cairn Energy shed between 0.4 and 2.3 percent.
On the upside, defensive sectors rallied. GlaxoSmithKline surged 3.2 percent, after the company assured that there was no liver-safety issue to its Avadia drug.
Supermarkets Tesco and Morrison Supermarkets advanced between 2.7 and 2.5 percent.
Associated British Foods, owner of retail outlet Primark, gained 3.1 percent after Goldman Sachs upgraded the company to "buy" from "neutral", saying the retailer offers relatively defensive characteristics in a recessionary environment, given the diversity of its business model.
Friends Provident climbed 3.8 percent. The UK life insurer said it is abandoning the sale of wealth management unit Lombard, nine months after putting the business on the market. (Editing by Quentin Bryar) ($1=.6146 Pound)
