The FTSE 100 index closed down 1.1 percent at 6,501.14 points. The index rose 2.3 percent the day before as Tesco jumped on a well-received restructuring plan but ended down 0.7 percent on the week.
Investment bank Jefferies said bad news on UK mortgage approvals, weak house prices and slower economic growth would impact housebuilders' shares in the first quarter of 2015.
Key players in the sector, Taylor Wimpey, Barratt Developments and Persimmon, were the worst-performing FTSE stocks in percentage terms with Taylor Wimpey falling 5.4 percent.
"The UK housing market continues to slow, with tighter mortgage rules and affordability constraints as well as the prospect of a rate rise making investors cautious," said Mike van Dulken, head of research at Accendo Markets.
The FTSE 100 hit a peak last year of 6,904.86 points, which marked its highest level since early 2000, and then lost ground towards the end of 2014.
Some traders said they would now buy shares on days when the index fell, due to prospects of the market recovering later in the year, partly on expectations of new economic stimulus measures from the European Central Bank (ECB).
"Buy on the dip until proven wrong," said Hampstead Capital LLP hedge fund manager Lex van Dam.
(Additional reporting by Atul Prakash; Editing by Larry King and John Stonestreet)
By Sudip Kar-Gupta
