Britain's FTSE weakens for third straight session

Wed Oct 9, 2013 4:03am EDT

* FTSE 100 down 0.5 percent

* Vedanta weak, traders cite Morgan Stanley downgrade

* FTSE 'fear gauge' at 1-month highs

By Tricia Wright

LONDON, Oct 9 (Reuters) - Britain's top share index fell on Wednesday for a third day running as the lack of progress on efforts to resolve a U.S. budget stalemate took its toll on investor sentiment.

Mining company Vedanta Resources was the standout faller, off 4.4 percent, with traders citing a Morgan Stanley downgrade as the catalyst. That offset strength elsewhere in the sector, which makes up a large chunk of London's blue chips, after aluminium producer Alcoa unveiled robust earnings.

The FTSE 350 Mining Index rose 0.1 percent.

The FTSE 100 was down 28.39 points, or 0.5 percent, at 6,337.44 points by 0741 GMT, taking its decline this week to 1.8 percent.

Investors' focus remained squarely on a U.S. budget stalemate that is well into its second week, with worries centring around the prospect of a historic debt default being triggered next week.

U.S. President Barack Obama said on Tuesday he would be willing to negotiate budget issues with Republicans only if they agree to re-open the federal government and raise the public debt ceiling - crucial to avoid default - with no conditions.

The U.S. concerns have pushed the FTSE volatility index , a crude gauge of investor fear, to one-month highs. The index was up 4.4 percent on Wednesday.

Thin trading volumes suggest many investors have been sidelined pending fresh developments in Washington. A third of the way into October, volumes on the FTSE 100 were just over 20 percent of those for the whole of September.

"Everyone's getting more and more nervous as the deadline gets closer. The rhetoric overnight wasn't terribly encouraging," Ian Williams, equity strategist at Peel Hunt said.

"You can't really see investors having any great urgency to get back in until we get a bit more clarity."

Technical analysts were downbeat on near term direction for the index, which was trading well below its 200-day moving average, now at 6,414.

"The near-term bearish trend can be confirmed," said Fawad Razaqzada, market strategist at GFT Markets, who targets 6,100, a previous level of support.

Stocks trading without the attraction of their latest dividend, namely Aviva, Kingfisher, Smith & Nephew, Tesco, Travis Perkins, Wolseley and WPP shaved 3.72 points off the index on Wednesday. (Reporting by Tricia Wright; editing by Patrick Graham)