By Shashwat Awasthi and Muvija M
(Reuters) - Britain's FTSE 100 (FTSE) closed 0.6% lower on Monday with financial stocks leading the losses on concerns over tensions in the Middle East, although oil-fuelled gains for Shell (L:RDSa) and BP (L:BP) provided some support.
And the FTSE 250 (FTMC) fell 1% after President Donald Trump threatened sanctions against Iraq and retaliation against Iran if it responded with force to last week's U.S. air strike.
Apart from energy-related shares (FTNMX0530), which were lifted by oil price gains, all others closed lower.
U.S.-Iran tensions have dampened initial hopes of a sustained rally in global equities on the back of an imminent Phase 1 U.S.-China trade deal.
"A severe escalation of tensions in the Middle East - or even outright hostilities - has the potential to easily subsume any benefits gained from the interim U.S.-China trade agreement," OANDA analyst Jeffrey Halley said.
Although BP and Shell had helped the FTSE 100 make gains on Friday, while other markets fell after the air strike, their weighting was not enough to stop the index falling.
"With so much cash heavily invested in global recovery trade in the elusive search for yield, a downward correction in asset prices could be aggressive," Halley said.
An index of airlines (FTNMX5750) recorded its worst two-day fall since early December, as higher oil prices raised concerns about a potential impact on their margins.
Morrisons (L:MRW) and Sainsbury's (L:SBRY) fell 3.3% and 1.1%, respectively, after Bank of America (NYSE:BAC) said retailers faced structural challenges, including market share losses to discounters such as Aldi UK, which reported higher sales, and profit dilution due to e-commerce.
Britain's major supermarkets are forecast to report lacklustre Christmas sales this week, reflecting weak economic growth and comparisons with generally solid festive results in 2018.
NMC Health (L:NMC), whose stock tanked 30% last month after criticism from short-seller Muddy Waters, skidded another 4.5% to the bottom of the main index.
Hikma (L:HIK) followed with a 4% slide after a rating downgrade by JP Morgan.