By Rebekah Curtis
LONDON, May 13 (Reuters) - British blue-chip shares reversed
early gains to drop by more than 1 percent by midday on Tuesday,
as surging UK inflation data cast shadows over the UK economic
outlook and credit-related writedowns hit Alliance & Leicester.
By 1030 GMT, the FTSE 100 <> was down 61.3 points at
6,159.3 points, as shares across Europe, earlier supported by
overnight gains in U.S. and Asian markets, gave up their early
advances.
The ratio of declining stocks to advancers on the FTSE was
about nine to one.
Britain's consumer price inflation rate leapt by its biggest
amount in nearly six years, to a full point above the central
bank's 2 percent target, as food and fuel bills soared.
That put Bank of England Governor Mervyn King a whisker away
from having to write to the government explaining how he plans
to bring inflation back to target, and will likely severely dent
expectations of further interest rate cuts.
"The concern is we are now about to enter a period of high
inflation and much slower growth," said Jeremy Batstone-Carr,
head of private client research at Charles Stanley.
"But obviously, by not cutting interest rates any more, the
risk is that the UK economy goes through a period of even slower
growth and possibly flirts with recession, so what we can say is
that the (Bank's) Monetary Policy Committee is probably facing
its toughest period since it was instituted.
"It's absolutely important that the Bank of England does not
blink, it needs to hold its nerve."
Topping the FTSE 100's <> percentage losers, Alliance &
Leicester <ALLL.L> fell by nearly 11 percent after taking a 192
million pound ($376 million) hit to profit from assets tarnished
by the credit crunch, taking its profit in the first four months
to below 2007 levels.
The bank, which warned in February it could leave its
dividend unchanged in 2008, said on Tuesday it was still too
soon to decide on the payout.
Also in the sector, HBOS <HBOS.L> shed 5.1 percent, Lloyds
TSB <LLOY.L> fell 2.8 percent and Barclays <BARC.L> lost 2.5
percent.
MORE MACRO GLOOM
British retail sales values fell for a second consecutive
month in April, suggesting tighter credit conditions and rising
household bills are forcing consumers to tighten their belts.
[]
"The (stock market) rebound has been based entirely on a
perception that the worst is over and confidence might be
returning. But as the economic slowdown gathers pace, I think it
would be premature to say the worst is over," Batstone-Carr
said. "One has to proceed with extreme caution at this moment."
The FTSE has fallen by more than 4.5 percent this year, but
has performed better than the pan-European FTSEurofirst 300
index <>, which has fallen by about 10 percent and is
among the top performing national indexes in Europe in 2008.
TUI Travel <TT.L>, Europe's biggest travel firm, added 1.5
percent to lead FTSE 100 gainers after saying demand for summer
holidays remained strong as it reported a lower first-half loss.
[]
Imperial Tobacco <IMT.L> added 2 percent after Morgan
Stanley lifted its price target on the stock to 3,050 pence from
3,000 pence.
Oil shares also reversed early gains to weigh on the index.
The sector lagged as U.S. crude oil fell below $124 a barrel
after the International Energy Agency cut its forecast for world
oil demand growth and investors took profits after a rally to
record highs the previous day.
On the downside, ITV <ITV.L> shed 4.6 percent after Goldman
Sachs downgraded the stock to "sell" from "neutral" and added it
to a pan-European sell list.
Also on the economic agenda, investors awaited U.S. retail
sales data for April at 1230 GMT.
(Editing by David Hulmes)
