By Josephine Mason and Muvija M
(Reuters) - London-listed stocks most exposed to the British economy fell as investors worried the country was heading for a chaotic no-deal exit from the European Union or an early national election, while global growth concerns also persisted.
It is relatively rare for the export-heavy FTSE 100 to move in lockstep with sterling, but losses in companies more exposed to the domestic economy, such as banks and housebuilders, offset gains in big internationally focussed firms.
The index was down 0.2% after climbing initially on sterling's fall to a three-year low, underscoring deepening concerns about the fall-out across the economy from a no-deal Brexit and the possibility of another election. The pound later clawed back some of those losses.
The midcap index <.FTMC>, traditionally harder hit by Brexit concerns, was down 0.1%.
Sterling's recovery came as British Prime Minister Boris Johnson lost his working majority in parliament when one of his Conservative lawmakers defected to the pro-European Union Liberal Democrats.
An election would thrust Brexit onto an uncertain path with three main options: a Brexit-supporting government under Johnson, a Labour government led by socialist Jeremy Corbyn, or a hung parliament that could lead to another referendum.
"In the short term, for many the idea that Corbyn will possibly be the next PM is more scary than a no-deal Brexit," said Markus Huber, trader at City of London Markets.
Stocks considered most exposed to any hit to Britain's wealth resulting from Brexit were the biggest fallers with Lloyds <LLOY.L> and Royal Bank of Scotland <RBS> dropped more than 1% each.
RBS and utilities also face the threat of nationalisation if a Labour government was to take charge.
Losses in homebuilders, which are vulnerable to a crash in house prices from an economic shock, were led by a 1.6% drop in the sector's biggest player Barratt. <BDEV.L>
Retailers Morrison <MRW.L> and Marks & Spencer <MKS.L> were also down roughly 1.5%. M&S also faces relegation from the FTSE 100.
Goldman Sachs has raised its odds of a no-deal Brexit to 25% from 20%, but analysts from Swiss bank UBS predicted the market might prove to be oversold.
"We think that investors are placing a higher probability on a no-deal Brexit at the end of October than is currently warranted," the UBS analysts said in a note laying out a number of Brexit scenarios.
"In our view, the most likely course in the weeks ahead is that parliament will succeed in blocking a no-deal Brexit, leading to a general election. Only then might we have some clarity."
Oil majors gave in to a wider gloom after U.S. manufacturing data raised concerns about a weakening global economy, while the U.S.-China trade dispute dragged down Asia-facing financials.
Among single stock moves, DS Smith <SMDS.L> slid 3.5% on the FTSE 100 as investors took note of the packaging company's comments that volatility in the macroeconomic environment continued even as it reaffirmed annual targets.
Just Eat <JE.L> shares slipped nearly 3% as a top-10 shareholder is set to vote against the food delivery company's proposed 9 billion pound merger with Takeaway.com, saying the deal undervalued Just Eat.
Plumbing products company Ferguson <FERG.L>, meanwhile, outperformed the index with a 2.1% rise after saying it would separate its UK operations.
Among midcaps, Restaurant Group <RTN.L> tumbled 13% on its worst day since November and sat at the bottom of midcap index after posting a loss versus a year-ago profit, while small-cap inkjet technology firm XAAR <XAR.L> plunged 30.7% to a 10-year low after warning on annual results.
(Reporting by Muvija M in Bengaluru and Danilo Masoni in Milan; Additional reporting by Indranil Sarkar; Editing by Sriraj Kalluvila and Alison Williams)