By Kit Rees and Julien Ponthus
LONDON (Reuters) - The UK's top share index rose from a two-month low on Monday but lagged behind European peers in a broader rally sparked by progress in U.S. tax reforms, as Britain and the EU failed to strike a deal on an initial Brexit divorce package.
The blue chip FTSE 100 (FTSE) index was up 0.55 percent at 7,340.91 points, a modest performance in comparison with France's CAC 40 (FCHI) and Germany's DAX (GDAXI), which were up 1.3 percent and 1.5 percent respectively.
"The late afternoon news about no deal meant that sterling surrendered most of its gains, but there was little help for the FTSE 100," said Chris Beauchamp, Chief market analyst at IG.
British Prime Minister Theresa May failed to strike a Brexit divorce deal with EU negotiators in Brussels despite earlier reports of a breakthrough agreement that would have kept British-ruled Northern Ireland aligned with EU regulations.
Last week's strength in sterling on the back of optimism over Brexit talks weighed on the FTSE 100, which ended the week with a 1.5 percent loss. The index fell to a two-month low as its predominantly dollar-earning constituents were hit by a rise in the currency.
"We are more negative on the UK, we think it will continue to lag. It's felt as if the excitement is elsewhere and we don't see that changing overnight," said Kevin Gardiner, global investment strategist at Rothschild Wealth Management.
Financials across Europe were the biggest boost to gains after U.S. efforts to slash corporate tax rates cleared a major hurdle.
In Britain, shares in Barclays (L:BARC), HSBC (L:HSBA), Lloyds (L:LLOY) and RBS (L:RBS) rose between 0.4 percent and 2.6 percent.
"For all the other indices around the world, the tax reform is something everyone's been keeping an eye on, so that's definitely the main driver in the U.S. and I think that's trickling over to Europe as well. We're see a bit of a relief rally," John Moore, trader at Berkeley Capital, said.
Banks are seen as the biggest beneficiaries of a cut in the corporate tax rate in the United States, and their shares also tend to see the biggest reactions when investors buy into risky assets.
Conversely, shares in more defensive stocks, such as precious metals miners Fresnillo (L:FRES) and Randgold Resources (L:RRS), were among the worst performers, both down 2.7 percent and 1.2 percent respectively.
UK housebuilders got a boost from favourable data showing a recovery in Britain's construction industry last month.
Persimmon (L:PSN), Taylor Wimpey (L:TW) and Barrat Developments (L:BDEV) rose between 0.5 percent and 1 percent.
