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* FTSE 100 down 0.7 percent
* BAE Systems drops on forecast earnings decline
* Miners hit by slide in China's factory activity
* Vedanta Resources top mid-cap faller after HSBC downgrade
By Tricia Wright
LONDON, Feb 20 (Reuters) - Britain's top shares lost ground on Thursday, led down by BAE Systems on a forecast earnings decline, while data showing a drop in China's factory activity knocked the miners.
The mood was also darkened by minutes of the U.S. Federal Reserve's latest policy-setting meeting, which indicated that the central bank would keep trimming its bond-buying stimulus unless there were a significant economic surprise.
Defence contractor BAE Systems sank 9.1 percent in brisk trade after it cautioned that continuing U.S. budget pressures could reduce earnings per share by 5-10 percent this year.
BAE systems receives 44 percent of its revenue from the United States.
"Awful headline figures from BAE Systems this morning," said Jordan Hiscott, senior sales trader at Gekko Global Markets.
"As Western governments withdraw their military assets and needs from deployments in Iraq and Afghanistan, defence cuts could become more prevalent in the sector - this is undoubtedly being highlighted in the figures this morning."
Hiscott saw scope for a further near-term drop in BAE Systems to 373 pence, the low from April 2013 which has acted as firm support, some 6 percent below current levels.
Trading volume in BAE stood at nearly 100 percent of its 90-day daily average, against the FTSE 100 of just 14 percent.
The UK blue-chip index was down 43.98 points, or 0.7 percent, at 6,752.73 points by 0851 GMT, trimming its rally since an early February low to around 5 percent.
This leaves the index nearly 2 percent shy of a peak hit in late January, before political and economic concerns in emerging markets took their toll on equities.
Miners exerted the most downward pressure on the index, down 1.8 percent, after activity in China's factories shrank again in February, a preliminary private survey found, reinforcing concerns of a minor slowdown in the economy.
The health of the Chinese economy is a key factor for the FTSE 100, given the mining sector's heavy weighting. It is the fifth biggest sector on the UK benchmark, accounting for around 8 percent of the index, Thomson Reuters data shows.
Vedanta Resources was the standout faller on the mid-cap FTSE 250 index, down 6.8 percent, further hit by a downgrade to "underweight" from "neutral" by HSBC, which cited sluggish cash flow generation.
"We think pricing in a recovery is premature," analysts at HSBC wrote in a note.
"Although Vedanta's structure was significantly simplified with the merger of its Indian subsidiaries Sesa Goa and Sterlite Industries in 2013, we think cash flow to VED remains more constrained than the market anticipates."
Still, the sector has got off to a solid start this year, up nearly 8 percent, against a flat showing on the FTSE 100. Mining firms are recovering from a sharp decline in 2013, after a sector-wide drive to offset falling metals demand with cuts in spending.