UK's FTSE retreats as Ukraine tension grows, investors eye ECB

Thu Aug 28, 2014 8:13am EDT

* FTSE 100 falls 0.4 percent

* Ukraine accuses Russia of bringing in troops

* State data points to German inflation pick-up in August

* Mining stocks hit by fall in iron ore prices

* Morrisons, CRH lifted by analyst upgrades

By Tricia Wright

LONDON, Aug 28 (Reuters) - Growing tension in Ukraine and speculation the European Central Bank will not act soon to loosen policy put pressure on Britain's top share index on Thursday.

Ukrainian President Petro Poroshenko said Russian forces had been "brought into Ukraine," and the country's security and defence council said areas near the Russian border had fallen to the Russians and the separatist Ukrainian rebels they support.

Slight increases in inflation in three German states suggested the threat of deflation was receding in Europe's largest economy. That should help stabilise the euro zone inflation rate and take some pressure off the ECB.

Speculation the central bank would act on policy had been building since ECB President Mario Draghi struck a dovish tone in a speech at Jackson Hole, Wyoming, last week.

ECB sources told Reuters on Wednesday new policy moves are unlikely at the bank's meeting next week, unless August inflation figures, due on Friday, show the euro zone sinking close to deflation.

The blue-chip FTSE 100, which on Wednesday had risen to its highest close since early July, was down 27.74 points, or 0.4 percent, at 6,802.92 points by 1124 GMT.

The FTSE 350 Mining Index fell 2.3 percent, with mining company Rio Tinto weakening by 3.6 percent on a drop in iron ore prices.

The FTSE has risen around 4 percent in the past 2 1/2 weeks, helped by the expectations of ECB stimulus. The index climbed to 6,894.88 points in mid-May, its highest level in more than 14 years. But it has not passed 6,900, considered a key hurdle before the FTSE can challenge record highs around 7,000.

Adrian Slack, a technical strategist at Novum Securities, however, said any pull-back on the FTSE should be relatively short-lived.

"I think we're just pausing for breath before we go higher at the end of the year," Slack said. "The downside looks pretty limited."

Among the brighter spots on Thursday, supermarket chain Wm Morrison advanced 1.7 percent, bolstered by a Deutsche Bank recommendation upgrade to "hold" from "sell". It reckons Morrisons will report in-line first-half results on Sept. 11.

CRH also rose 1.7 percent as Credit Suisse upgraded its rating on the Irish building supplies group to "outperform" from "underperform", citing valuation grounds. (Additional reporting by Sudip Kar-Gupta; Editing by Larry King)