UK's FTSE hit by U.S. politics, China slowdown worries
* Political stalemate on U.S. debt issues hits equity markets
* FTSE implied volatility index at 3-week highs
* Hedge funds building up shorts on Burberry - trader
By Toni Vorobyova
LONDON, Oct 7 (Reuters) - Britain's main share index fell on Monday, with broad sentiment bruised by political stalemate in Washington over the U.S. debt ceiling, and with luxury goods group Burberry hit by concerns over a slowdown in its sales in China.
The U.S. government moved into a second week of shutdown, raising the risk that a compromise will not be reached in time to meet an Oct. 17 deadline on raising the debt ceiling and averting a potential sovereign default.
Although most investors still expect the issue to be resolved, sentiment is gradually getting more nervous, with people opting to sell or stay out of the market altogether.
"This shutdown is coupled with the debt ceiling issue and, until we see a firm resolution on that, I think we will see a lot of investors wait on the sidelines," said Jordan Hiscott, trader at Gekko Global Markets.
Last week, FTSE volumes were the seventh lowest this year, with activity around 12 percent below the 2013 average.
Top fallers on Monday included BAE Systems, which makes 40 percent of its sales to the U.S. government. Its shares were down 2 percent to 444.70 pounds.
Some of the top year-to-date performers, like Easyjet - down 3.3 percent to 1,253.90 - and Sports Direct , down 3 percent to 684.30 - also succumbed to profit-taking as implied volatility on the FTSE 100 - a crude barometer of investor risk aversion - jumped to three-week highs .
Traders said some investors were also liquidating positions in order to free up funds to invest in the privatisation of the Royal Mail postal service, for which order books are due to close on Tuesday.
The FTSE 100 index itself was down 61.87 points, or 0.96 percent by 1100 GMT, at 6,392.01.
The broad sell-off saw around 90 percent of the stocks dip into the red. Adding to U.S. political woes were resurgent concerns about the strength of the Chinese economy, with the World Bank cutting its 2013 and 2014 economic growth forecasts for the world's top metals consumers.
The news hit miners as well as luxury goods group Burberry , whose own chief executive told the French newspaper Les Echos that China's slowdown could be more than just a passing phase for the luxury goods sector.
Burberry shares dropped 1.8 percent in heavy volume.
"We've got fast money hedge fund accounts opening up short positions on Burberry," said Hiscott at Gekko Global Markets.
For some investors, though, the general market weakness continued to present a buying opportunity.
Cavendish Asset Management fund manager Paul Mumford said he had been using sessions when the market fell to add to holdings in mining stocks such as Antofagasta, BHP Billiton and Rio Tinto .
"The market doesn't like the uncertainty, but I think the U.S. debt situation will be resolved," he said. (Additional Reporting By Sudip Kar-Gupta; Editing by Kevin Liffey)
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