= MARKET COMMENT: London Stocks End Lower; Debt Worries Weigh

By Sarah Turner

LONDON (Dow Jones)--London shares finished sharply lower on Tuesday, as worries about the state of government finances were thrown into the spotlight by credit rating downgrades for Dubai and Greece.

The U.K. FTSE 100 Index ended down 1.7% at 5,223.13. Other European shares ended the session with losses.

Banks dropped in London, with Royal Bank of Scotland shares down 7.7%, Barclays (BCS) down 3.2% and HSBC Holdings (HBC) down 2.5%.

British lenders are seen as some of the firms most exposed in the Europe to the debt woes of Dubai that have roiled global markets for almost two weeks.

On Tuesday, Moody's Investors Service downgraded all six Dubai government-related issuers and Morgan Stanley estimated in a report that the debt of the Dubai government-related companies exceeds the emirate's gross domestic product.

Credit agency downgrades also spread to Europe on Tuesday, with Fitch Ratings cutting Greece's credit rating to BBB+ from A- Tuesday, citing worries over the country's medium-term outlook for public finances.

Meanwhile, Moody's Investor Services warned that the United States and Great Britain may test the boundaries of their Aaa sovereign ratings due to deteriorating public finances.

Both countries, however, "display an adequate reaction capacity to rise to the challenge and rebound," wrote Pierre Cailleteau, managing director of Moody's sovereign risk group.

Turning to corporate updates, Tesco traded down 2.3% at 425 pence after the supermarket giant reported a 2.8% rise in U.K. comparable sales. That was below the 3.1% comparable-sales increase recorded in the second quarter.

"After a good run in the shares and on the back of weaker British Retail Consortium figures in the U.K. today, we'd expect Tesco's shares to pull back a touch," said analysts at Bank of America Merrill Lynch.

They estimate that comparable U.K. food sales growth slowed to 1.5% in November from 2.3% in October. Overall U.K. same-store retail sales values rose 1.8% in November from the same month last year, the British Retail Consortium reported.

Tesco rivals J Sainsbury , down 1.2%, and William Morrison , down 0.1%, were also a bit weaker on Tuesday.

Tesco's 2.8% growth in comparable sales excluding fuel and sales tax "was modestly below our and consensus expectations of 3%," added analysts at Bernstein.

"However, in our view this is still a robust performance, in the context of moderating inflation and sharper slowdowns recently reported by U.K. competitors, albeit for slightly different reporting dates," the broker added.

Tesco said that an improving positive comparable-sales trend in non-food is continuing, with particularly strong growth in toys, electrical and entertainment.

But Tesco's growth in non-food sales could be making the environment more difficult for other retailers.

Video-games retailer Game Group saw its shares drop 19.5% outside the top index on Tuesday after it reported that 18-week comparable sales fell 13.9%.

"We have seen strong competition in all of the markets that we operate in. In the U.K., in particular, we have seen significant pricing activity from the supermarkets," the firm said.

Services Desk; Dow Jones Newswires; [phone]/9274