UPDATE 1-FTSE drops into a loss for 2014 as defensive shares fall

Wed Jan 8, 2014 11:51am EST

* FTSE 100 index slips 0.4 percent, down for the year

* Index underperforms European bourses

* Imperial, BATS fall after report of China smoking ban

* Sainsbury slips after cautioning on outlook

By Alistair Smout

LONDON, Jan 8 (Reuters) - Britain's top share index fell on Wednesday, slipping back into negative territory for the year, after concerns about a smoking ban in China knocked back tobacco companies and following a cautious outlook from Sainsbury.

The FTSE 100 closed down 33.67 points, or 0.5 percent, at 6,716.16 by 1551 GMT. It remains pinned in a 70-point trading range this year, 2 percent off 2013's high.

The index underperformed major markets in continental Europe, especially the peripheral euro zone markets, which continued a recent streak of outperformance.

"It's natural to pause here (after a strong December rally), but going forward it's still looking good," Mike McCudden, head of derivatives at Interactive Investor, said of the FTSE.

Imperial Tobacco fell 2.9 percent and British American Tobacco 1 percent, after reports that China's health officials wanted to ban smoking in public places by the end of this year.

"With China, there's a lot of concern over smog and air pollution. The doors have been flung open with regards to reform, and with that will come a change in standards with regards to healthcare," said Alastair McCaig, an analyst at IG.

"It will increasingly become the focus, and that's a battle that tobacco companies are going to have to face in the coming years."

So-called defensive stocks outperform in times of economic uncertainty, and the tobacco sector gained strongly in the first half of 2013, climbing 15 percent. But since then it has given up its gains as investors rotate into stocks that do well as the economy expands.

Consumer staples, a broad sector including tobacco stocks and food retailers, took 13 points off the index in total, with J Sainsbury also weighing on the market. The grocer fell 2.5 percent after its chief financial officer lowered the company's growth forecast.

The drop came despite a strong start. The company reported that sales at its stores open over a year rose 0.2 percent in the 14 weeks to Jan. 4, beating forecasts, which ranged from flat to down 1 percent.

Barclays reiterated an "overweight" rating on the stock following the call, saying that it believed the firm was upfront about challenges because it was prepared for them.

"We think that the negative share price reaction this morning is somewhat surprising," analysts at Barclays said in a note.

"It is of course true that the cut in (like-for-like) sales guidance is unwelcome, but it is a much lower cut than the market could reasonably have expected given where consensus 3Q LFL estimates stood."