By Johann M Cherian and Shashwat Chauhan
(Reuters) -UK stock indices slumped on Wednesday, as stubbornly high domestic inflation sparked fears of more interest rate hikes by the Bank of England, while concerns around the U.S. debt ceiling deadlock further dented sentiment.
The blue-chip FTSE 100 index fell 1.8%, reaching its lowest level in nearly two months while the mid-cap FTSE 250 shed 1.4%.
Official data showed Britain's stubbornly high inflation rate fell by less-than-expected last month, while core inflation surged to a 31-year high, bolstering the chances of more rate hikes.
"Today's data suggests inflation will fall much slower than previously expected," said Rob Wood, chief UK economist at BofA Global Research.
"The risk that inflation does not halve from its peak by year-end is growing in our view."
Japanese bank Nomura, U.S. bank Citi, BofA Global Research and Credit Suisse (SIX:CSGN) all revised their forecasts for interest rates in Britain.
Traders are nearly fully pricing in a 25-basis point hike by the Bank of England in June, which would be the 13th straight hike by the British central bank.
UK homebuilders and life insurers bore the brunt of the selling pressure, declining 4.5% and 5.2% respectively.
Aviva (LON:AV) tumbled 5.9% after the insurer reported subdued quarterly net flows to its wealth arm. Activist investor Cevian Capital said it has sold its entire stake in the company.
Lingering uncertainty over the ongoing U.S. debt ceiling negotiations also weighed on investor sentiment.
Bucking the trend, Marks & Spencer Group (LON:MKS) jumped 12.9% after the retailer forecast a modest annual revenue growth and said it would resume its dividend with an interim payout in November.
UK equities have been broadly range-bound since late April, as investors digested mixed corporate results, while also staying cautious given the U.S. debt ceiling impasse.