FTSE falls to three-month low on U.S. debt concerns

By Sudip Kar-Gupta

LONDON (Reuters) - The FTSE 100 fell to a three-month low on Wednesday as a lack of major progress in resolving a U.S. budget stalemate hit the stock market.

Although many investors still expect U.S. politicians to reach a deal eventually over the country's budget and debt ceiling, they see little progress for equity markets in October.

"It's all rather bearish in the short-term," said XBZ European equity options broker Mike Turner.

The blue-chip FTSE 100 index closed down by 0.4 percent, or 27.92 points, to 6,337.91 points, to mark its lowest closing level since ending at 6,229.87 points on July 3.

There was little impact on the FTSE from data on Wednesday that showed a shock fall in UK industrial output, although the data pushed 10-year UK gilt yields to a six-week low and hit sterling and broader investor sentiment.

"Today's industrial production numbers are a slight blot on the report card," said IG market analyst Alastair McCaig.

Mining group Vedanta was the hardest-hit FTSE 100 stock, falling 4.7 percent, which traders attributed to Morgan Stanley's downgrade on it to "underweight" from "equal-weight".

In late May, the FTSE 100 raced to a 13-year high of 6,875.62 points, but it has since lost ground due to expectations of less monetary stimulus in future from the U.S. Federal Reserve.

A Reuters poll on Wednesday forecast the FTSE 100 ending 2013 at the 6,700 point level.

Although the FTSE remains up around 8 percent since the start of 2013, it has slipped again in October after the U.S. government had to partially shut down due to the still-unresolved disagreement among politicians over the country's budget.

The U.S. budget standoff has led to concerns about the $16.7 trillion U.S. debt ceiling, which Treasury Secretary Jack Lew has said the government will hit no later than October 17.

Republicans and Democrats in Congress saw signs of hope on Wednesday for a break in their fiscal impasse, as members of both parties floated the possibility of a short-term increase in the debt limit to allow time for broader negotiations on the budget.

Berkeley Futures associate director Richard Griffiths said his firm had sold "put" options due to expire on October 18 on the FTSE 100 with strike prices of 6,200 and 6,250 points, allowing investors to bet on a possible 160 points fall by then.

However, Griffiths said those "put" options were relatively cheap, due to the risk that they would be worthless should a U.S. debt deal be reached before then, which could lead to a sharp swing higher on global stock markets.

APS Alpha technical strategist Adrian Slack felt the FTSE 100 would drift lower as the U.S. debt deadline loomed nearer.

"The closer we get to October 17, the more likely it is that markets will drift lower, until we get there," he said.

(Additional reporting by Tricia Wright; Editing by Hugh Lawson)