* FTSE 100 index falls 0.5 percent
* Ex-divs knock 8.2 points off FTSE index
* IAG falls after Lufthansa's profit warning
By Atul Prakash
LONDON, June 11 Britain's top share index slipped on Wednesday, pressured by stocks trading without the attraction of their latest dividend and a decline in International Airlines Group shares after its rival Lufthansa issued a profit warning.
British Airways owner IAG fell 4 percent after Lufthansa said it would not reach its profit targets for the next two years because competition is suppressing prices on its main European and U.S. routes. Lufthansa shares fell 14.5 percent.
"Airlines are going to face a tough time as competition in the sector is increasing. Lufthansa's profit warning is a reminder that the situation is not going to improve in the near future and their margins might come under further pressure," David Battersby, investment manager at Redmayne-Bentley, said.
"However, I continue to be positive on the market and think that 7,000 for the FTSE 100 by the end of the year is quite possible. There are a lot of UK companies which are priced attractively and giving good dividends."
IAG was the biggest decliner on the blue-chip FTSE 100 . The index fell 35.36 points, or 0.5 percent, to 6,838.36 points by 1057 GMT.
Stocks trading without the attraction of their latest dividend, namely Johnson Matthey and Vodafone, accounted for the majority of the FTSE 100's falls, knocking 8.24 points off index. Vodafone dropped 3.3 percent, Johnson Matthey 1.9 percent.
Analysts said that investors were losing faith in the idea that the index, which is just 1.3 percent off the record high it set in December 1999, will reach new highs in the near term.
"We think the FTSE 100 feels quite toppy up here - we are bullish in the medium term but at the moment, with summer approaching and volumes continuing to be light, we feel as if there could be some profit-taking around these levels," said Mark Ward, Sanlam Securities' head of trading.
Alpari analyst Craig Erlam said a break beneath Tuesday's low of 6,835 would provide the first indication that the index was headed back towards its 6,800-range lows.
Frothy valuations are preventing investors from putting more money to work in equities. The FTSE 100 is trading on a 12-month forward price/earnings ratio of 13.7 times, against its 10-year average of 11.7 times, Thomson Reuters Datastream shows.
Some analysts said the index will fail to make much headway until the interim reporting season gets underway, around mid-July, allowing earnings to catch up.
"I think given the steady grind higher recently we're bumping at the top of the valuation range. I just think we're still at the point where we're waiting for the earnings to support that," said Peel Hunt equity strategist Ian Williams.
J Sainsbury bucked the trend and rose 2 percent, the top FTSE 100 gainer. Its sales update was not as bad as some analysts had expected.
Sales at its stores open more than a year fell 1.1 percent, excluding fuel, in the 12 weeks to June 7. Forecasts called for a drop of 0.5-1.5 percent and a decline of 3.1 percent in the fourth quarter. (Additional reporting by Tricia Wright; Editing by Larry King)