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The FTSE 100 closed 25 points higher despite a slump in banking shares as fears for the sector increase.

The index ended a volatile session at 4,147.06, as losses in the banking sector were offset by a rally from miners.

Eurasian Natural Resources climbed 8.56 per cent, while Rio Tinto rose 7.57 per cent and Anglo American jumped 7.53 per cent.

However, fears banks will post steep losses when they release results and require more government assistance sent stocks plunging – along with the lifting of the ban on short-selling on bank stocks.

Barclays dropped by almost 25 per cent over the day, closely followed by HBOS, which fell 13.46 per cent, while Royal Bank of Scotland dipped 12.15 per cent.

David Jones, chief market analyst at IG Index, said: "You can almost write the weekend headlines after today's performance by financial stocks in London – the short selling ban was lifted today and the likes of Barclays and RBS have been the biggest casualties.

"But it was only in the afternoon that the sector swan dived as US markets quickly gave up earlier gains.

"Today's drop by some of the banking stocks - whether short selling was the catalyst or not - still goes to demonstrate the level of nervousness and complete lack of confidence from investors in this sector of the market."

He added: "With negative news still coming out of the US banking market and the nationalising of Anglo Irish Bank investors clearly feel that banks have not hit the bottom yet."