LONDON (Reuters) - Leading shares shed 1.4 percent by mid-session on Friday, as financials reeled after U.S. insurance giant AIG <AIG.N> posted a $7.8 billion (4 billion pound) quarterly loss and soaring oil prices exerted pressure on global markets.

By 11:27 a.m., the FTSE 100 was down 86.1 points at 6,184.7, a day after the Bank of England's decision to hold interest rates at 5 percent.

Overnight, U.S. stocks rose but financials remained under pressure after AIG posted hefty losses on bad credit-related investments. In Asia, Japan's Nikkei (news) fell 2.1 percent on Friday, under pressure from a surge in U.S. crude oil prices.

All FTSE 100 banks fell and together took 28 points from the index, with Royal Bank of Scotland (LSE: 91ID.L - news) <RBS.L> and HBOS <HBOS.L> both down about 4 percent. HSBC <HSBA.L> dropped 2 percent after Morgan Stanley (SPU - news) downgraded the global banking group to "underweight" from "equal-weight" on the U.S. debt crisis.

"All in all it's a pretty dire day for financials. The recent rally is largely viewed as being overdone," said Peter Dixon, an economist at Commerzbank (Xetra: 803200 - news) .

"(But) we're clearly over the worst compared to where we were a month ago," he said of writedowns in the bank sector. "The days of the big surprises may well be behind us."

"We are of course in May and its 'sell in May and go away' time," he added.

Lloyds TSB <LLOY.L> fell 3.4 percent. Britain's fifth biggest bank is looking to sell euro- and dollar-denominated fixed-rate hybrid perpetual securities, according to a term sheet seen by Reuters on Friday.

Adding pressure on the market, oil hit a record high above $125 a barrel, boosted by strong demand for diesel, concern about supplies and a renewed bout of buying by investment funds.

CARPHONE WEIGHS

Topping the FTSE 100 losers, shares in Carphone Warehouse (LSE: CPW.L - news) <CPW.L> fell 6.6 percent and extended their previous session's fall as traders cited continued market disappointment about the firm's deal with U.S.-based Best Buy Co (NYSE: BBY - news) <BBY.N>.

Best Buy, the world's biggest electronics retailer, said on Thursday it would pay $2.1 billion for half of Carphone Warehouse's retail business to take on the European consumer electricals market.

On the upside, WM Morrison <MRW.L> shares rose 1.2 percent after JP Morgan upgraded its price target to 340 pence from 320, reiterating an overweight rating.

Sainsbury (LSE: SBRY.L - news) 's <SBRY.L>, meanwhile, added 0.6 percent following a Panmure price target upgrade to 320 pence from 280 pence.

The mining sector dragged on the index as copper prices fell 0.5 percent. Antofagasta (LSE: ANTO.L - news) <ANTO.L> and Vedanta Resources (LSE: VED.L - news) <VED.L> both lost more than 3 percent.

Kazakhmys (LSE: KAZ.L - news) <KAZ.L> fell 4 percent after surging on Thursday on renewed market talk of bid interest from Eurasian Natural Resources Corp (ENRC) <ENRC.L>.

Shares in nuclear power generator British Energy (LSE: BGY.L - news) <BGY.L> fell 2.7 percent on fading hopes that a bidding war would push up the price for the stake being sold by the government.

As a preliminary bid deadline approached on Friday, sources familiar with the matter said one candidate, Germany's RWE (Xetra: 703712 - news) <RWEG.DE>, would not make an offer by the deadline, while in Paris, dealers speculated that another potential buyer, France's EDF <EDF.PA>, might bid for RWE instead.

A British Energy spokesman had no comment.

Among midcaps, engineer IMI (Milan: ISP.MI - news) <IMI.L> added 6.2 percent as revenues rose 7 percent in the first four months of 2008 and it guided analysts to increase their revenue forecast for its valve engineering Severe Service arm by 5 percent because an investigation into irregular payments at the division -- which makes up around 22-percent of total sales -- was "largely complete".

Boosting IMI further, Numis raised its price target on the stock.

(Additional reporting by Michael Taylor; Editing by Quentin Bryar)