August 6, 2014 / 3:55 PM / in 3 years

Ukraine, economic gloom drag on FTSE; pharma shares lag

(Updates at market settle)

* FTSE 100 closes down 0.7 pct after setting 3-mth low

* Pharma hit as tax breaks for US suitors come under threat

* Disappointing economic data across Europe weaken demand

* Ukraine/Russia tensions hit global equity markets

By Francesco Canepa

LONDON, Aug 6 (Reuters) - Britain’s top equity index fell on Wednesday, pummelled by disappointing economic data and mounting concern over the crisis in Ukraine.

Pharma stocks were the biggest fallers on the FTSE 100 as investors worried that interest from U.S. suitors may dry up if tax breaks for companies that shift their headquarters overseas are reduced.

Broader market sentiment was also dented by data from Britain and continental Europe, the two regions where British blue chips derive about half their sales. Reports showed UK industrial output and manufacturing grew less than forecast in June, Italy unexpectedly slid into recession in the second quarter and German industrial orders fell short of forecasts.

“The European equity indexes had been moving ahead of events,” Ecclesiastical fund manager Chris Hiorns said. “The economic recovery that this bull run in equities was based upon is not really that evident, and that has hurt sentiment.”

The FTSE 100 fell 46.32 points, or 0.7 percent, to 6,636.16 points after hitting a three-month low of 6,588.43 points. The index cut losses in late trade, mirroring a bounce on Wall Street.

Healthcare groups Shire, Smith & Nephew and AstraZeneca, down between 3.6 percent and 4.1 percent, led declines after three prominent U.S. senators urged President Barack Obama to use his executive authority to reduce or eliminate tax breaks for companies that move their headquarters overseas to cut their U.S. tax bills.

Shire has agreed to a $55 billion takeover by U.S. rival AbbVie, which plans to locate the combined company in Britain, where taxes are lower. Smith & Nephew and AstraZeneca had also attracted interest from U.S. companies this year.

“If this loophole does shut down, UK healthcare (companies) will be less attractive to U.S. names, but the latter would still have offshore cash balances with which to invest,” Numis analyst Sally Taylor said.

Investors were unnerved by news that Russia had massed about 20,000 combat-ready troops on Ukraine’s eastern border and could use the excuse of a humanitarian or peacekeeping mission to send them across the border, according to NATO.

“As the tensions mount, we’ll see more of a correction on the equity markets. The mentality now is not to buy on dips but to sell on rallies,” Securequity sales trader Jawaid Afsar said.

Eight British blue chips went ex dividend on Wednesday, shaving up to a further 14 points off the FTSE 100. (Additional reporting by Sudip Kar-Gupta; Editing by Louise Ireland)

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