By Sudip Kar-Gupta
LONDON (Reuters) - Britain's top share index fell off 1-1/2 month highs, with Lloyds bank among the worst stocks, while traders held off adding to positions expecting the U.S. Federal Reserve to reduce stimulus measures.
The blue-chip FTSE 100 index closed down by 0.8 percent, or 52.69 points, at 6,570.17 points on Tuesday, having risen 0.6 percent on Monday to its highest close since early August. The FTSE's decline represented its biggest one-day percentage fall so far in September.
Part-nationalised bank Lloyds fell 3.5 percent to 74.65 pence in heavy volume to make it one of the worst performers, reflecting Britain's sale of a 6 percent stake in the company at 75 pence per share.
Trading volumes in Lloyds came in at around 4 times the average 90-day amount, while volumes on the FTSE came in at 1.6 times the average 90-day amount.
Most analysts and investors welcomed the government's move, saying it marked further progress in Lloyds' recovery, although analysts at Investec kept a "sell" rating on Lloyds and pointed to the bank's "anaemic" profits.
Investors also refrained from buying new equity positions as the Fed started a two-day meeting on Tuesday.
According to a Reuters poll of economists, the Fed is expected to announce it will scale back a bond-buying programme that has driven much of this year's global equity rally by $10 billion a month.
The Fed's programme - known as "quantitative easing" (QE) - drove down bond yields and pushed investors over to the better returns on offer from stock markets, with the FTSE 100 up 12 percent since the start of 2013.
"There may be some short-term corrections and volatility as a result of the Fed meeting but the long-term outlook for equity markets is still extremely attractive," said George Godber, who manages the Miton UK Value Opportunities Fund.
"Even if they cut back by $10 billion, there will still be a lot of 'QE' going into markets," he added, saying his preferred stocks included housebuilders due to signs of a UK economic recovery.
Strategists at U.S. bank Citi also kept a longer-term positive view on the UK stock market. Citi maintained its end-2013 target for the FTSE 100 at 7,000 points and raised its end-2014 target to 8,000 points.
APS Alpha technical strategist Adrian Slack said that in a "worst-case scenario" - in which the Fed scaled back its bond-buying programme by more than the $10 billion expected by investors - the FTSE 100 could fall 5 percent.
However, he said there would still be plenty of buyers looking to pick up stocks on any market fall, which would ensure any decline on the FTSE 100 would be relatively short-lived.
"I'd be very surprised if it would have a really negative effect on equities. There are plenty of buyers on the sidelines still waiting to come in," he said.
(Additional reporting by Tricia Wright; Editing by Ruth Pitchford)