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UPDATE 2-FTSE 100 drops ahead of Brexit talks, U.S. presidential debate

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* Pub owners fall on possibility of extended shutdown

* Ferguson surges on restoring dividend payouts

* Brexit negotiations to resume later in the day

* FTSE 100 down 0.5%, FTSE 250 lost 1.1% (Updates to close)

Sept 29 (Reuters) - The FTSE 100 fell on Tuesday on worries about a stalling economic recovery and surging COVID-19 cases, with pub owners sliding on the prospect of further curbs as another round of Brexit negotiations began.

European Union negotiators signalled they were willing to begin work on a joint legal text of a trade deal with Britain, the Times reported, as the three days of talks got under way.

The global mood was also subdued ahead of Tuesday’s U.S. presidential debate between incumbent Donald Trump and Democrat challenger Joe Biden.

The blue-chip FTSE 100 index dropped 0.5%. The mid-cap index slipped 1.1% and was on track to record its worst month since March.

Banks and oil stocks were among the biggest decliners, while defensive play such as utilities and industrials rose.

A raft of stimulus measures had led a FTSE 100 rally from March lows, but the index was on course for its second monthly decline in five as fresh coronavirus-linked restrictions and Brexit uncertainties dulled sentiment.

Among bright spots, plumbing parts distributor Ferguson rose 6% after it restored its dividend as cost-reduction measures helped it report a 4.1% rise in annual profit.

Retailer B&M European Value Retail rose as brokerages cheered a strong first half. “The latest update ...confirms it is well-positioned for tougher economic times,” said Russ Mould, investment director at AJ Bell, also tipping it as a prime merger candidate for British supermarket retailer Asda.

Baker Greggs lost 8% after saying it expects trading to remain below normal for the foreseeable future due to the pandemic.

Pub owners JD Wetherspoon, Marston’s, Mitchells & Butlers and Restaurant Group all slumped more than 5% after a junior minister said Britain’s nightclubs may have to stay shut until a COVID-19 vaccine is developed. (Reporting by Shashank Nayar in Bengaluru; editing by Uttaresh.V and John Stonestreet)

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