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UPDATE 2-UK stocks fall as bank stocks weigh; factory activity jumps

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

* UK factory activity expands at fastest rate since 1994

* Weaker pound boosts heavyweight consumer staple companies

* FTSE 100 down 0.7%, FTSE 250 down 0.6% (Updates to market close)

May 4 (Reuters) - British shares were subdued on Tuesday as a drop in bond yields across Europe dragged financials stocks down, while data showed manufacturing activity grew at its fastest pace since 1994 as businesses tried to make up for lost ground during the pandemic.

The blue-chip FTSE 100 index fell 0.7%, with bank stocks, including HSBC Holdings, Barclays PLC and Standard Chartered Plc posing the biggest drag on the index.

Heavyweight oil majors BP and Royal Dutch Shell gained 2.3% and 1.1% respectively. The stocks provided the biggest boost on optimism about higher demand as economies reopen.

“People are switching a bit out of stocks into bonds after the U.S. Treasury secretary and Fed officials dampened down inflation fears,” said Keith Temperton, equity sales trader at Forte Securities.

“The big thing we are waiting for this week is the U.S. jobless numbers. That’s going to be the big key to power the market for the whole of May.”

Euro zone bond yields fell on Tuesday, away from recent multi-month highs as volatility in stocks boosted demand for safe havens, giving bonds a respite from a recent heavy selloff.

The domestically focused mid-cap FTSE 250 index shed 0.6%.

The FTSE 100 has gained more than 7.4% year-to-date as investors flocked to energy and materials stocks that are seen benefiting the most from a stronger economic recovery due to speedy COVID-19 vaccine rollouts and government policy support.

Meanwhile, data showed April PMI rose to 60.9 in April. All eyes now are on the Bank of England policy meeting on May 6, where it will likely ease its foot off the stimulus pedal and reduce its pace of bond purchases.

Among other stocks, dollar-earning large companies Diageo , Imperial Brands and British American Tobacco gained as the pound softened.

Reporting by Devik Jain in Bengaluru; editing by Uttaresh.V and Mark Heinrich

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