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UPDATE 2-FTSE 100 ends worst session in nearly two-months; cigarette makers, oil stocks weigh

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

* BATS, Imperial Brands slump on nicotine cut fears

* Elementis drops after rejecting takeover bid

* AB Foods falls on a 50% drop in first-half profit

* FTSE 100 down 2.0%, FTSE 250 off 1.7% (Updates to close)

April 20 (Reuters) - London’s FTSE 100 ended lower on Tuesday, dragged down by stocks of heavyweight oil companies and cigarette makers, while Associated British Foods slipped after a downbeat first-half earnings update.

The blue-chip index dropped 2%, the highest single day fall since Feb. 26, with tobacco firms British American Tobacco and Imperial Brands declining 7.6% and 7.3%, respectively, after a report said the United States was considering a rule to cut nicotine in all cigarettes sold in the country to levels at which they are no longer addictive.

Shares of AB Foods fell 5.9% after it posted a 50% drop in first-half profit, hurt by COVID-19 lockdowns that shuttered its Primark fashion stores.

“This seems somewhat of an overreaction given that this isn’t a surprise and while the stores have been closed for a good part of the last 12 months, its other businesses have performed better than expected,” said Michael Hewson, an analyst at CMC Markets.

Sterling hit its highest in more than six weeks against the dollar, further weighing on the FTSE 100, many of whose constituents earn most of their revenues overseas and see their repatriated profits eroded by a stronger pound.

“While today’s losses are quite large, they don’t appear to be being driven by concerns over the economic outlook,” said Hewson.

The domestically focussed mid-cap FTSE 250 index fell 1.72%, with Elementis reversing early gains to end 1% lower after it rejected a 160-pence per share takeover approach from the U.S. chemicals firm Innospec Inc.

Meanwhile, official figures showed Britain’s unemployment rate unexpectedly fell to 4.9% in the December-February period, although tax data showed the number of employees on company payrolls fell by 56,000 between February and March, the first decline in four months.

The FTSE 100 index has gained 6.2% so far this year, but has underperformed its European peers during the period as a recent rise in Treasury yields and a jump in coronavirus infections across the globe weighed on sentiment.

Among other stocks, cyber security company Avast jumped 1.3% after upbeat first-quarter trading update. ($1 = 0.7143 pounds) (Reporting by Devik Jain and Shashank Nayar in Bengaluru; Editing by Uttaresh.V and Alex Richardson)

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