March 3 (Reuters) - London's FTSE 100 fell for a second straight session on Tuesday, as investors dialled down hopes for interest-rate cuts after surging energy prices rekindled inflation worries ahead of fresh UK economic and borrowing forecasts.
Shares of economically sensitive banks slumped, with HSBC (HSBA.L), down 4.7%, Barclays (BARC.L), off 4.2% and Lloyd's Banking Group (LLOY.L), losing 3.4%.
By 1144 GMT, the blue-chip FTSE 100 index (.FTSE), dropped 2.7%, its steepest one-day fall in nearly a year. The midcap FTSE 250 index (.FTMC), also down 2.7%, slid to its lowest in six weeks.
The Office for Budget Responsibility is expected to cut its forecast for economic growth this year, while British finance minister Rachel Reeves is likely to stick closely to her promises to fix the public finances in a budget update speech later in the day.
"Set against a backdrop of rapidly rising energy prices, there will undoubtedly be plenty of scrutiny over how higher oil and gas prices could spark a fresh bout of inflation," said Joshua Mahony, chief market analyst at Scope Markets.
British government bond yields leapt for a second day on Tuesday as investors slashed their bets on Bank of England rate cuts amid mounting concerns that the U.S.-Israeli war on Iran could add to inflationary pressures.
Traders are pricing less than a one-in-three chance of a quarter-point BoE rate cut this month, a steep drop from the roughly 80% seen late last week.
Among stock movers, Smith & Nephew (SN.L), gained 3.9% after Barclays raised its price target on the medical products maker.
IAG (ICAG.L), dropped 6.5%, tracking a wider decline in carriers as fuel prices jumped and Middle East travel disruptions persisted for a fourth day.
Reporting by Medha Singh in Bengaluru; Editing by Shilpi Majumdar
