* Falling commodity prices hurt miners
* BAE Systems falls on possible prosecution by fraud office
* U.S. non-farm payrolls eyed on Friday
By Harpreet Bhal
LONDON, Oct 1 (Reuters) - Britain's leading shares closed 1.7 percent lower on Thursday, the lowest closing level in more than two weeks, pressured by losses in mining stocks and banks while BAE Systems fell on prosecution fears.
The blue-chip FTSE 100 closed 86.09 points lower at 5,047.81, mirroring early falls on Wall Street as data showed the U.S. manufacturing sector grew at a slower pace than expected in September.
Lonmin led the miners lower, down 8 percent, weighed down by a Deutsche Bank downgrade to "sell" from "hold". Antofagasta, Anglo American, Fresnillo and Eurasian Natural Resources lost 3 to 5.4 percent as metals prices fell across the board.
Hefty gains in the three months to September helped UK shares post their best quarterly performance since the index was launched in 1984, but analysts warn that equities are long overdue a correction after the summer rally.
"The momentum seems to have slowed down as investors feel the stock market recovery is outpacing real economic recovery... many traders see the FTSE ending the year around these levels," said Arifa Sheikh-Usmani, equity trader at Spreadex.
Banks were among the biggest decliners, with Barclays, HSBC , Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered shedding 1.8 to 4.5 percent.
Britain's five biggest banks agreed to abide by internationally agreed curbs on bonuses, the British government said on Thursday.
UK manufacturing data revealed a modest contraction last month after employers cut jobs for a 17th straight month and the pace of pick-up in new orders slowed, adding to negative sentiment on the index as economists had expected a rise.
Investors will keep a close eye on U.S. non-farm payrolls figures due on Friday for further signs of the extent of economic recovery in the world's biggest economy.
BAE SYSTEMS
Among the fallers on the FTSE 100, BAE Systems lost 4.4 percent as Britain's Serious Fraud Office said it intended to seek the Attorney General's consent to prosecute the firm for offences relating to overseas corruption.
Property firm Segro slid 5.5 percent after Goldman Sachs downgraded its stance on the company to "sell" from "neutral" to reflect the impact of incorporating its takeover of Brixton.
London Stock Exchange fell 0.5 percent. The exchange said it had entered into exclusive discussions with trading platform Turquoise Trading Limited.
On the upside, brokers' upgrades helped several stocks outperform the broader market. Argos chain owner Home Retail climbed 2.7 percent to the top of the gainers list as Cazenove upped its rating for the company to "outperform" from "in-line".
Vedanta Resources bucked a weaker mining sector to rise 2.4 percent as Morgan Stanley upped its rating for the India-focused firm and Deutsche Bank raised its target price in a review of the sector.
Plumbing service group Wolseley climbed 0.9 percent, supported by a Citigroup upgrade of the company's rating to "buy" from "hold" with the broker citing opportunities for the firm in the United States and a better balance sheet.
Meanwhile, British lenders expect to make credit more easily available to households and businesses over the next three months, a Bak of England survey showed. A brighter economic outlook and rising house prices were likely to boost mortgage lending.
(Editing by Nigel Stephenson)