UPDATE 2-FTSE 100 drops by most in three weeks as dour earnings, stronger pound weigh

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* Barclays slumps as annual profit halves

* Indivior, Smith+Nephew fall on gloomy outlook

* Pound gains against dollar, euro

* FTSE 100 down 1.4%, FTSE 250 drops 1.0% (Updates to close)

Feb 18 (Reuters) - London’s FTSE 100 fell on Thursday by the most in nearly three weeks as a set of glum earnings reports underscored the impact of the COVID-19 pandemic, while a stronger pound also weighed on the export-heavy index.

The blue-chip FTSE 100 closed 1.4% lower, led by declines in healthcare, energy and banking stocks, while the mid-cap index fell 1%.

Sterling edged up against both the euro and the dollar, reaching its highest in almost a year.

Barclays fell 4.4% after the British lender’s 2020 annual profit halved.

“The company (Barclays) got the cold shoulder from the market as attention was drawn by large provisions on Covid-related bad debt and a warning of a continuing impact through the course of 2021,” said Russ Mould, investment director at AJ Bell.

Meanwhile, Bank of England policymaker Michael Saunders said negative interest rates may soon be the best tool for the Bank of England, and raised the prospect of unemployment taking a long time to return to pre-pandemic levels.

England’s third national COVID-19 lockdown is helping reduce infections, a study found, but the prevalence of cases remains high as Prime Minister Boris Johnson eyes a cautious route to re-opening the economy.

The FTSE 100 has recovered nearly 35% from its March 2020 lows but has been largely range-bound since the beginning of this year as weak corporate earnings undermine hopes of economic growth in the second half of the year.

Smith+Nephew fell 5.9% after warning that the impact of the pandemic is likely to continue into the first half of 2021 and posting a drop in annual trading profit.

Indivior fell 6.5% after the opioid addiction treatment maker predicted 2021 revenue would slip on a difficult first-half and posted an annual revenue decline of 18%. (Reporting by Shivani Kumaresan, Amal S and Shashank Nayar in Bengaluru; Editing by Kirsten Donovan)