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FTSE-100 index close lower

LONDON: Britain's FTSE 100 closed lower on Tuesday, dragged down by declines in British Telecom and banking stocks along with a sharp fall in retailer Kingfisher following a disappointing trading update.

Unsettled during the session by a German union pay claim which raised worries about European inflation trends, the UK index retreated from its gains of the past two sessions to end down 88.8 points or 1.3 percent at 6,518.9.

UK equity trading volume reached an active 1.5 billion shares as trading ended for the day at 1630 GMT.

Decliners were in a majority of more than two to one in the blue chip UK index, while even a firm performance on Wall Street -- where the Dow Jones average was up some 58 points by the London close -- did little to lift the mood.

The FTSE 100 had bounced in the previous two days from its heavy losses of the early sessions of the year, but was unable to sustain the uptrend despite further strong gains in leading media stocks such as Reuters Pearson PSON.L and Daily Mail & General Trust .

In Germany, the powerful IG Metall union said it was seeking an above-inflation pay rise of up to 5.5 percent in 2000, seen as making it more likely that the European Central Bank will hike rates before the end of the quarter.

"The German situation has affected sentiment more than people expected...generally the market feels a bit weak," said the head of trading at one leading investment bank.

Germany's Dax index fell 0.5 percent.

There was also weakness in the banking sector, with HSBC HSBA.L and Lloyds down around three percent amid worries over rising interest rates and nervousness ahead of the banks reporting season. Abbey National fell six percent.

The bank sector wiped some 34 points from the FTSE, the biggest negative influence.

"The sector is nervous about interest rates being brought up to choke off the boom in the economy and investors are therefore worried about the cyclical nature of banks," said Warburg Dillon Read analyst Chris Ellerton.

Kingfisher was the day's biggest blue chip casualty, sliding 14 percent as a warning of pressure on margins prompted a round of cuts to profit forecasts.

Overall, market participants said it was no surprise that leading shares remained jittery against a backdrop of expected rising interest rates on both sides of the Atlantic.

The Bank of England's monetary committee is widely expected to increase rates by a quarter point on Thursday, while in the U.S. the next session of the policy-setting Federal Open Markets Committee takes place on February 1-2. BT aside, there were continued gains in media and telecom shares in the flurry of excitement following Monday's merger plan involving Time Warner and Internet service provider America Online .

Media groups Daily Mail and Pearson, as well as financial information provider Reuters, were the FTSE 100's biggest gainers, up nine percent or more, while there were also strong gains in the likes of Telewest and EMI .

However telecoms group Cable & Wireless fared worse, dropping 5.4 percent to continue the volatile trend that has dogged its progress since early last month.

Dealers were generally nonplussed about C&W's performance, though one noted persistent sell orders through the day.

Among other individual stocks, steelmaker Corus was down 7.5 percent, extending Monday's decline after a downgrade to "market performer" from "buy" at Deutsche Bank.

However, second line issues stood firm with the FTSE 250 Mid Cap index closing 38.8 points or 0.6 percent higher at 6,583.1, its third straight record close.

Pace Micro Technology Plc helped power the advance, surging for a second day after Monday's stronger than expected first half profits. The stock was up 23.8 percent.

Psion PON.L was another strong 250 performer, up 13.5 percent on an deal with mobile phone giant Vodafone AirTouch which launched a global platform and branded portal for mobile data and Internet linking a number of top technology names. The FT Small Cap index also hit the latest of a series of record peaks, rising 29.5 points or 0.9 percent to 3,170.4.

Chartwise the FTSE 100 found support in recent sessions at just above the 6,400 level, but has fallen sharply from its intraday peak of 6,950.6 set on the last trading day of 1999.

Technical analysts said the index could be set for a period of range trading, between 6,400 and just above 6,600 where it peaked this morning and on Monday.-Reuters