* Banks, commodities dip as risk appetite wanes
* UK manufacturing shows contraction, surprises investors
* BAE falls as UK Serious Fraud Office seeks prosecution
By David Brett
LONDON, Oct 1 (Reuters) - Britain's top shares fell 0.7 percent by mid-session on Thursday, as weak banks, miners and energy stocks dragged the index lower, outweighing strength in life insurers.
At 1054 GMT, the FTSE 100 was down 33.98 points at 5,099.92, having closed 0.5 percent lower on Wednesday -- the last session of its strongest-ever quarter.
"The consensus view is that the FTSE is not out of the bear-infested woods just yet, and that there will be a market correction, probably sooner rather than later," said Philip Gillett, Sales Trader, IG Index.
Miners were the hardest hit. Lonmin, Antofagasta, Fresnillo , Anglo American and BHP Billiton dropped 2.5 to 4.4 percent.
Vedanta Resources, however, bucked the weak sector trend, jumping 4.1 percent as Morgan Stanley upped its rating for the Indian-focused firm and Deutsche Bank raised its target price in a review of the sector.
UK manufacturing data, which 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, also added weight to the bear's case.
"The release of further declining UK manufacturing figures surprised analysts and investors," said Gillett.
Banks were also hit. Britain's five biggest banks agreed to abide by internationally agreed curbs on bonuses, the British government said on Wednesday.
HSBC, Royal Bank of Scotland, Barclays, Standard Chartered, and Lloyds Banking Group shed 0.2 to 1.4 percent.
British lenders expect to make credit more easily available to households and businesses over the next three months, a survey by the Bank of England showed.
Energy stocks shed earlier gains as investor appetite for risk waned, with crude prices hovering around $70.
BG Group, BP, Cairn Energy and Royal Dutch Shell lost between 0.5 and 1.7 percent.
Among individual fallers, BAE Systems was the top blue chip casualty, down 5.3 percent as the UK's Serious Fraud Office said it intends to seek the Attorney General's consent to prosecute the firm for offences relating to overseas corruption.
Icap, the world's biggest interdealer broker, shed 1 percent after it said first-half profits were set to fall, blaming high investment costs and lower levels of activity in its most lucrative business lines.
INSURERS WANTED
Life insurers were on investors' wanted lists. The sector has enjoyed a resurgence on the back of continued M&A speculation.
Legal and General rose 2.7 percent, taking its gains since the beginning of the week to over 20 percent, as the company is seen as a potential takeover target for entrepreneur Clive Cowdery's Resolution.
Standard Life, Aviva and Friends Provident, which has already agreed to a takeover by Resolution, added weight to the gains, rising 1.0 to 1.3 percent.
Building supplies company Wolseley rose 3.5 percent supported by a Citigroup upgrade to "buy" from "hold" after a recent trading update.
Real estate issue British Land gained 1 percent after Goldman Sachs upgraded its rating to "neutral" from sell.
Peer Segro, however, fell 2.5 percent, after Goldman Sachs cut its rating to "sell" to reflect the impact of incorporating its takeover of Brixton.
U.S. futures point to a softer opening ahead of a raft of data, including ISM manufacturing, pending home sales, personal income and consumption, and weekly jobless claims
Investors are looking for further evidence of the strength of the recovery in the United States, ahead of Friday's non-farm payrolls. (Editing by Hans Peters)