UK shares suffer biggest fall since July after Fed rattles investors

* FTSE 100 closes down 1.6 percent
* Threat to US stimulus, disappointing euro zone PMIs hit
cyclicals
* BAE bucks the mkt, benefits from dividend hike
* Traders look to buy on market dip

By Alistair Smout
LONDON, Feb 21 (Reuters) - Britain's blue chip shares posted
their biggest one-day loss since July on Thursday on concerns
the Federal Reserve could end its stimulus programme sooner than
expected, removing a driver of the recent equity rally.
The FTSE 100 closed down 103.83 points, or 1.6
percent, at 6,291.54, dropping below the 6,300 level for the
first time in 10 days. Stocks that benefit the most in rising
markets, or "cyclicals", fell furthest.
The index's decline was the biggest since last July, at the
height of the euro zone crisis and just a few days before
European Central Bank chief Mario Draghi promised to do
"whatever it takes" to save the euro, prompting a global rally
in equities.
Commodity stocks and banks
combined to take over 50 points off the FTSE 100
index, and volatility jumped 13 percent.
Investors became cautious after minutes of the Federal
Reserve's January policy meeting showed a number of policymakers
think the U.S. central bank might have to slow or stop its asset
purchase programme before seeing the pickup in hiring the
programme is designed to deliver.
"The biggest impact (on today's falls) has been the Fed
minutes, and supposedly a more hawkish tone by the Fed," James
Butterfill, global equity strategist at Coutts, said. Still, he
expected the Fed to continue with asset purchases, or
quantitative easing, in the near term.
"It's also off the back of how much markets have run up year
to date. We've already surpassed our base-case fair value on the
FTSE within the first month and a half, so it's not surprising
we'd see a pullback."
The market had closed at a five-year high on Wednesday,
marking an 8.4 percent gain so far this year, against a 5.8
percent rise for the whole of last year.
Also weighing on sentiment on Thursday were
worse-than-expected euro zone purchasing managers surveys, which
dealt a blow to hopes the currency bloc might emerge from
recession soon.
Mining stocks were the biggest drag on the FTSE 100 as
concerns about an end to U.S. monetary stimulus hit a sector
already hampered by weaker metals prices and market talk of a
hedge fund liquidating big positions in commodities.
BHP Billiton was among the worst off, tumbling 4
percent. It extended falls from the previous session when it
reported its worst profit drop in more than a decade, with Citi
downgrading its rating on the stock to "neutral".
All but seven blue chip stocks fell in the broad-based
sell-off. Defence firm BAE was the biggest riser,
gaining 4.1 percent, as investors welcomed news of a share
buyback and the company's decision to lift its dividend by 4
percent despite posting a fall in profits.

BUYING THE DIPS
Though the index fell below 6,300 it remained in the range
between 6,200 and 6,400, which it has been in all month, with
some seeing the dip as an opportunity to buy.
"We're absolutely due weakness right now, and the question
is when one buys into it, providing the trends remain positive,"
David Esfandi, Managing Director at Ashcourt Rowan Asset
Management, said.
"A couple of percent further weakness would be very much
welcomed as a buying opportunity, although the data still needs
to be monitored closely."
The intraday low of 6,277.96 was near resistance areas being
targeted by traders as opportunities to buy back into the FTSE.
"The market is still looking to push higher but we still see
some short term weakness before the next move higher," Atif
Latif, director of trading at Guardian Stockbrokers, said.
"On the downside 6,250-6,275 will have to hold for the next
upside move to 6,415-6,550."

(Editing by Susan Fenton)