Britain's FTSE ends strong quarter on weak note, hit by falling banks

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* FTSE 100 drops 1.1 pct

* Financials weigh as Deutsche worries intesify

* Capita (LSE: CPI.L - news) hit by downgrades

* FTSE set for strong quarterly gain

By Alistair Smout

LONDON, Sept 30 (Reuters) - Britain's top share index dropped on Friday, taking the shine off a strong quarter, as banks fell on renewed uncertainty over Deutsche Bank (LSE: 0H7D.L - news) 's financial health and as a spate of broker downgrades hit outsourcer Capita.

The FTSE 100 was down 78.33 points, or 1.1 percent, at 6,841.09 by 0820 GMT, with financials taking 25 points off the index.

Banks followed the European sector lower after Germany's largest lender admitted it had an image problem with investors, although the bank played down a report that counterparties are wary about doing business with it.

"It's mainly speculation at the moment, so there aren't material concerns (for UK banks) yet. The counterparty risk for Deutsche Bank is tremendously high though," London Capital (LSE: LCG.L - news) Group's senior market analyst, Ipek Ozkardeskaya, said.

"If something happens to a bank as big as Deutsche Bank ... there is systemic risk. But for now, if the negative mood in the market can be managed, it shouldn't lead to anything more serious in the short term."

In all, FTSE 350 banks were down 2 percent, with Barclays (LSE: BARC.L - news) , Royal Bank of Scotland (LSE: RBS.L - news) and Lloyds down between 2.2 percent and 3.2 percent.

RBS unveiled sweeping structural reforms ahead of new UK rules to separate its retail operations from riskier parts of its business, in an overhaul set to confine its historic RBS retail brand to Scotland.

Top individual faller was Capita, down 4 percent and slumping for a second straight day.

It has fallen 30 percent since a profit warning on Thursday, and Friday saw a swathe of target price cuts on the stock.

However, while Panmure cut the stock to "sell" from "hold", other analysts who had been bearish on the stock raised their ratings.

Goldman Sachs (NYSE: GS-PB - news) removed the stock from its "conviction sell" list, upgrading it to neutral, although it slashed its target price for the outsourcing firm.

Britain's FTSE was set to end September up 5 percent for the quarter, with a monthly gains of 0.9 percent.

It was up for a second straight quarter, with its international exposure and sterling weakness helping to shield the index from the effects of uncertainty surrounding Britain's vote to leave the European Union.

The mid-cap FTSE 250, which has more domestic exposure, has rebounded strongly this quarter.

After ending the second quarter down 3.9 percent following the vote, the FTSE 250 rose 8.5 percent this quarter, after data suggested that the initial fall-out from the referendum had not had the negative economic impact that was widely expected. (Editing by Louise Ireland)