* FTSE 100 index flat in afternoon trading
* Tesco slips as cuts profit forecast, dividend
* AstraZeneca buoyed by speculation of new Pfizer bid
By Atul Prakash
LONDON, Aug 29 (Reuters) - Britain's top share index steadied in cautious trading on Friday, with stronger pharmaceutical stocks on renewed merger and acquisition talks offsetting weaker retailers after another profit warning by Tesco.
AstraZeneca rose 1.8 percent on talk of further takeover interest from Pfizer following an abortive $118 billion takeover attempt in May. Other drugmakers also gained, with Shire rising 0.7 percent and GlaxoSmithKline up 1 percent.
However, retailers put a lid on the broader market's gains after Tesco, Britain's biggest retailer, cut its profit forecast for the second time in two months and slashed its interim dividend by 75 percent as tough operating conditions continued to ravage its business.
"Tesco's profit warning shows the sector is now changing. Discount retailers like Aldi and Lidl are putting up significant competition with shoppers favouring the cheaper alternatives," Tom Robertson, senior trader at Accendo Markets, said.
"In the run up to Christmas, they will no doubt have to compete in order to maintain their positions or there may be more profit warnings on the horizon."
Tesco shares fell 5.9 percent, the top decliner in the blue-chip FTSE 100 index, while Marks & Spencer, Sainsbury and Morrisons were down 2 to 4.7 percent.
Tesco, which had issued a profit warning in July as it announced the departure of its chief executive Phil Clarke, also said its new head Dave Lewis would start work on Monday, a month earlier than expected, and launch a full review of the company.
"They were pretty awful figures," Joe Rundle, head of trading at ETX Capital, said. "I think that probably the market will give them a little bit of a break because of the new CEO coming in, starting a month early, so at least they're trying to be proactive."
"But I think the worrying sign is they're cutting their dividend and a lot of people are in it for the dividend," Rundle said, adding he saw scope for the shares, which have been languishing at 10-year lows, to trend towards 200 pence - some 13 percent below current levels.
The benchmark FTSE 100 index was flat at 6,804.87 points by 1356 GMT. It has risen about 4 percent in the past 2-1/2 weeks, helped by expectations of some stimulus from the European Central Bank.
However, the ECB was not likely to take any immediate policy measure next week as a drop in euro zone inflation to a fresh five-year low in August was on expected lines.
The FTSE 100 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. (Additional reporting by Tricia Wright, editing by Ralph Boulton)