UPDATE 2-UK shares drop as inflation jumps; British American Tobacco weighs

(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window)

* Consumer price index +0.7% y/y in Jan

* British American Tobacco biggest drag on FTSE 100

* Rio Tinto drops despite upbeat earnings

* FTSE 100 down 0.6%, FTSE 250 drops 1.3% (Updates to close)

Feb 17 (Reuters) - British shares ended lower on Wednesday as a third national lockdown affected demand for new goods leading inflation to pick up a little more than expected in January, while British American Tobacco slumped despite positive earnings.

The commodity-heavy FTSE 100 ended 0.6% lower, with construction and financial stocks leading declines. British American Tobacco was the biggest drag.

UK inflation rose a little more than expected last month as the country went back into a coronavirus lockdown, pushed up by higher food prices and less discounting of household goods such as sofas, official data showed.

“This upward (inflationary) trend is set to continue, given that by April, we’ll no longer be comparing current petrol prices to pre-pandemic levels and a 9% rise in the household energy price cap will lift headline CPI to the 1.5% area in the second quarter,” said James Smith, an economist at ING.

The FTSE 100 has recovered nearly 35% from its March 2020 lows and is now 12% below its peak last year, led by stimulus support, but a surge in infections and lockdowns have recently slowed the pace of gains.

Prime Minister Boris Johnson is plotting a staged exit from lockdown that would see the United Kingdom’s battered economy returning to work over the next five months after leaping ahead of most of the world on vaccinating its people.

The mid-cap FTSE 250 index ended -1.3% lower.

In company news, British investment platform Hargreaves Lansdown dropped 6.9% to the bottom of the blue-chip index after Peter Hargreaves, the largest shareholder and co-founder, sold $416 million worth of shares.

Miner Rio Tinto fell 0.4% after reporting its best annual earnings since 2011 and declaring a record dividend payout.

Signature Aviation slid 0.2% after agreeing to sell its engine repairs business to U.S.-based StandardAero for $230 million. (Reporting by Shivani Kumaresan in Bengaluru; Editing by Sriraj Kalluvila, Vinay Dwivedi and Jonathan Oatis)