Britain's FTSE nears two-year low as weak earnings deepen rout

By Josephine Mason

LONDON (Reuters) - British shares slumped to a near two-year low on Friday on growing concerns about slowing earnings growth, with investors punishing Rolls Royce and RBS.

The FTSE 100 (.FTSE), on track for its biggest monthly drop in a decade, closed down 1.4 percent as selling accelerated after a weak start on Wall Street where grim earnings from Amazon and Alphabet shook confidence.

Financials led the UK pack lower with a 21-point drop, followed by the energy sector, which was hit by weaker oil prices and a strengthening U.S. dollar after better-than-expected U.S. GDP data.

Only 10 stocks were in positive territory, with Randgold Resources (RRS.L) rising 3.6 percent as investors sought shelter in safe-haven gold assets and defensive sectors. Bullion hit three-month highs. [GOL/]

Notching up a fifth straight weekly loss, the Midcap FTSE 250 was down 1.2 percent. Pan European stocks (.STOXX) were set for their biggest monthly drop since August 2011.

A slew of downbeat corporate outlooks with warnings of higher raw material costs, damage from tariffs and waning Chinese demand underscored worries about corporate growth.

Analysts have been downgrading their forecasts for European earnings at their fastest pace since 2016, according to Refinitiv IBES data.

"There aren't many more lifelines for FTSE heavyweight sectors, with base metals down on China-growth worries and oil still in the doldrums on perceived weak demand," Mike van Dulken and Artjom Hatsaturjants at Accendo Markets said in a note.

RBS (RBS.L) fell 5 percent, touching its lowest since February 2017, after the UK bank warned of economic uncertainty and its profit lagged forecasts. The lender said it had taken a 100 million pound ($128 million) impairment provision to account for greater uncertainty.

"The latest results are a bit of a curate's egg," said Laith Khalaf, senior analyst at Hargreaves Lansdown. "The headline numbers are ahead of expectations, but this is largely a matter of one-off items toppling onto the right side of the scales.

"The core business is looking pretty stagnant, at best, and the bank's interest margin is heading in the wrong direction, despite rising rates," Khalaf added.

Rolls Royce (RR.L) was rocked by news it will produce fewer engines for Airbus' (AIR.PA) new A330neo jet than expected, sending its shares down as much as 13 percent to 1-1/2 year lows. It recovered some ground to close down 3.5 percent.

Calls for Europe to halt arms sales to Saudi Arabia after the killing of journalist Jamal Khashoggi added pressure to the defence sector.

Mining, metals and oil companies were also among the biggest losers, with Evraz (EVRE.L) topping the loser board with a 6.3-percent drop and oil major BP (BP.L) down 1.4 percent, tracking broader commodity prices lower.

Among midcaps, Travis Perkins (TPK.L) and Babcock (BAB.L) were hit after LafargeHolcim's (LHN.S), the world's largest cement maker, became the latest building materials company to warn of higher costs.

Pensions provider Just Group (JUSTJ.L) jumped 8 percent, extending recent gains, after UK regulators on Thursday delayed the introduction of new rules on equity release mortgages.

($1 = 0.7797 pounds)

(Reporting by Josephine Mason; additional reporting by Helen Reid; Editing by Mark Heinrich and Susan Fenton)