* FTSE down 1.3 percent by midday
* Rate outlook, fears of losses hit banks
* Mining stocks weaken, but energy sector gains
By Simon Falush
LONDON, June 26 (Reuters) - Britain's top share index fell
more than 1 percent by midday on Thursday, led by banking stocks
that slipped after the Federal Reserve halted its rate-cutting
cycle and on worries over further credit market-related losses.
By 1045 GMT the FTSE 100 <> was down 71.7 points, or
1.3 percent, at 5,594.4, reversing gains from the previous day.
The U.S. Federal Reserve left the benchmark Fed funds rate
at 2 percent on Wednesday, effectively ending one of its most
aggressive rate cutting campaigns to limit the economic fallout
from the housing and credit crises.
But the central bank voiced increased concerns about
inflation in a statement following its two-day policy meeting.
Bank of England policymakers testifying before parliament's
Treasury Select Committee on Thursday also noted increased
inflation expectations, a factor driving investor expectations
of a rate rise in the UK, traders said.
Confidence on the UK economy has also been pummelled by a
series of data showing the housing market is in decline and the
consumer sector faring badly, contributing to a fall of over 12
percent in the FTSE 100 since mid-May.
"It's the extension of the trend we've been seeing for some
time," said Jim Wood-Smith, head of research at Williams De
Broe.
"The Treasury Select Committee is saying inflation is going
to be even higher, growth will be even slower and there's going
to be more contraction in banks' balance sheets which means that
there's no end in sight for the credit crunch."
More bearish news on banks came as Goldman Sachs cut its
view on U.S. brokers to "neutral" from "attractive" and added
Citi <C.N> to its 'conviction sell' List, forecasting around $9
billion of writedowns in the second quarter.
Lloyds TSB <LLOY.L> was the biggest loser in the UK banking
sector, down 4.2 percent, and Barclays <BARC.L> fell 3.3
percent.
Companies serving the banking sector also suffered with
global information provider Thomson Reuters <TRIL.L> falling by
5.8 percent after Morgan Stanley cut the price target of the
stock to 1,280 pence from 1,420 pence.
MINERS WEAKEN, OILS GAIN
Mining stocks also fell, with BHP Billiton <BLT.L> dropping
0.7 percent, Xstrata <XTA.L> down 0.9 percent and Rio Tinto
declining 1.5 percent.
But energy shares gained. BP <BP.L> was up 0.9 percent and
Royal Dutch Shell <RDSa.L> was up 0.7 percent.
The London Stock Exchange <LSE.L> fell 7.1 percent, having
gained 14 percent on Wednesday after Qatar's sovereign wealth
fund was quoted on television saying it was in talks with London
and German stock exchanges for a new partnership.
The LSE and Lehman Brothers said on Thursday that they
planned to set up a pan-European off-bourse trading platform.
Traders said there had already been speculation about the deal.
"It was a case of buy the rumour, sell the fact. The fact
remains that there are a number of potential competitors for the
LSE which has seen the share price halve this year," said Angus
Campbell, head of sales at Capital Spreads.
Marks & Spencer <MKS.L> was down 2.4 percent after corporate
governance advisers PIRC said on Wednesday that investors should
vote against the election of Stuart Rose as executive chairman
of Marks and Spencer at the retailer's annual shareholder
meeting on July 9. []
Tesco <TSCO.L> fell 2.6 percent after reports that U.S.
Democratic presidential candidate Barack Obama has stepped up
his appeals to the supermarket to let unions represent workers
at its new U.S. chain.
