FTSE ends lower as banks fall

LONDON, England (Reuters) -- Banking shares fuelled a slide in Britain's FTSE 100 index on Wednesday, with Wall Street losses adding to the bearish mood and oil stocks in retreat after an unexpected rise in U.S. crude inventories.

The star performer was Shire Pharmaceuticals, surging 14 percent after the drugmaker beat forecasts with first-quarter earnings and said it might grow this year, Reuters news agency reported.

The benchmark index ended down 40.1 points or 0.78 percent at 5,125.5, with banks and oil sectors each knocking 10 points off the FTSE.

The index neared a two-month low of 5,116.0 as the U.S. tech-heavy Nasdaq fell 2.5 percent by the UK close.

"In the short-term we think the market will continue to trade range-bound and relatively subdued. It is difficult to see what the catalyst is going to be," said Kevin Fenelon,

investment manager at Britannic Asset Management.

"There is concern about when and to what extent the profit cycle will follow the economic cycle," he said.

Shares in utility Scottish Power rose 2.8 percent as it reported full-year pre-tax profit of 567 million pounds -- down on the year but at the top end of expectations.

Banking stocks came under pressure, with HBOS down 2.6 percent after Merrill Lynch downgraded its rating on the stock to "neutral" from "buy." Standard Chartered closed 2.4 percent lower ahead of its AGM on Thursday.

Oil heavyweight Shell fell 1.6 percent and rival BP shed 1.3 percent against the background of weaker crude prices after the rise in inventories. Shell is scheduled to announce its first-quarter results on Thursday.

Trading interest was subdued as continental European markets were closed for the May Day Holiday and market volume was a modest 1.8 billion shares. FTSE 100 losers narrowly outnumbered gainers.

Weak Nasdaq hits telecoms

Despite the Nasdaq weakness, mobile phone operator mmO2 held onto some of its early gains, ending up 2.3 percent after Schroder Salomon Smith Barney upgraded it to "speculative buy" from "hold." The stock tumbled 35 percent during April.

Other telecoms were weaker, with BT down 4.2 percent and Vodafone 1.8 percent lower in line with weakness in their U.S. peers.

Wall Street darkened the mood, with the blue-chip Dow Jones industrial average falling 110 points by the 1530 GMT London close after data suggesting some softness in the construction sector and smaller-than-expected growth in U.S. manufacturing.

The Nasdaq Composite was down 43 points when UK trading ended. But one market watcher pointed to differences between the UK and U.S. markets.

Mike Lenhoff, chief strategist at private client fund manager Gerrard, said an analysis showed that the U.S. equity market had become more sensitive to long-term interest rates, earnings surprises and valuation than the UK.

"The key strategic message as far as asset allocation is concerned is that the UK deserves to be overweighted so long as conditions for markets remain bearish but it deserves to be underweighted when conditions turn bullish," Lenhoff said.

Among other companies with results, the world's largest diversified miner BHP Billiton shed 1.6 percent on news of a drop in third-quarter net profits.

It said industry stock levels of a number of commodities remained high, with little evidence

of an increase in demand. Rival Anglo American also lost 1.6 percent.

Anglo-Norwegian Healthcare group Amersham fell three percent, resuming its downward trend after first-quarter sales on Monday which showed a smaller-than-expected rise.

Food retailer Safeway rose 3.8 percent, extending Tuesday's gains amid speculation that it could be a takeover target.

France's Carrefour denied it had any interest in bidding for Safeway, contrary to one report, but one dealer said the UK's fourth largest retailer was regarded as "in play."

Elsewhere in the sector, Morrison added 3.9 percent.

Among mid-cap shares, the biggest gainer was telecoms equipment maker Marconi. It surged 25 percent, extending gains in the previous session amid speculation that a deal with bankers to restructure its debts was on the cards.

Fund managers were firm a day after news that Friends Ivory & Sime had bought the UK asset management arm of Royal & Sun Alliance, fuelling sector consolidation hopes.

Friends Ivory rose 2.4 percent, Amvescap added 2.6 percent and Aberdeen Asset Management jumped 4.4 percent as investors turned positive on the stock in the wake of its first-half results on Monday.

The owner of Anglian Water AWG fell 5.7 percent, reversing gains in the previous session when it offered to pay more interest on some of its bonds in an effort to coax reluctant investors into supporting plans to split the company.

Wealth management group St James's Place Capital tumbled 10.4 percent after reporting a 19 percent fall in first-quarter new business.

The FTSE 250 midcap index dipped 0.1 percent and the techMARK index of technology shares was virtually flat.

Among small caps, Laura Ashley sank 18.7 percent after the clothing and furnishings retailer said it had decided not to pay a dividend following a downturn in trading.