By Danilo Masoni and Helen Reid
MILAN (Reuters) - Britain's top share index hovered near a six-month low on Wednesday as rising hopes for a Brexit deal lifted the pound, hurting the shares of big multinational companies.
The FTSE 100 retreated by 1.3 percent while the pan-European STOXX 600 fell 1.6 percent as tech stocks suffered their worst day since the 2016 Brexit vote and investors became anxious about rising yields impacting equities.
The top UK index fell as sterling hit a new 3-1/2 month high on reports that Britain and the European Union had made progress in negotiations over an Irish border backstop, a key hurdle in reaching a deal on Britain's planned departure from the EU in March next year.
"After a summer of heightened tensions, which saw the markets pricing in the increasing likelihood of a no-deal Brexit, it appears that both the EU and UK are now prepared to commit to some form of deal," said Ricardo Evangelista, analyst at ActivTrades in London.
Data showing the British economy's summer surge turned out to be stronger than expected, as warm weather spurred consumer spending and housebuilding, boosted domestically exposed shares but had little impact on the broader stock market.
Several analysts expect Britain and the EU to reach a negotiated Brexit deal, a scenario that could further boost the pound and weigh on the relative performance of the FTSE against global equities.
Further strength in the pound would penalise exporters but could be a tailwind for domestic stocks. The UK has set March 29, 2019 as the date of its exit from the EU.
The FTSE 100, which is down 6 percent this year against a 4.4 percent drop in the broader European market, derives 70 percent of its profits from overseas.
Among the biggest drags on the FTSE 100 were big multinationals Diageo (LON:DGE) and Reckitt Benckiser, down 2.4 and 1 percent respectively.
Burberry was the worst-performing stock, down 6.2 percent as investors sold shares in the richly valued luxury sector following a Morgan Stanley (NYSE:MS) downgrade and amid worries over the key Chinese market.
Miners were also a big drag on the index, with BHP Billiton (LON:BLT), Glencore (LON:GLEN), and Rio Tinto (LON:RIO) all falling 2 to 2.3 percent as metals prices eased.
Telecoms firm BT was the biggest gainer on the FTSE 100, up 4.2 percent as the broader sector in Europe, seen as a "defensive" play favoured during riskier times, was also in demand.
Banks proved the biggest support thanks to recent gains in global bond yields. Domestically exposed banks Barclays (LON:BARC) and Lloyds (LON:LLOY) rose 2.9 percent each.
Despite the broader hopes around Brexit, shares in London-focused homebuilder Telford Homes tumbled 7 percent after it flagged rising uncertainties ahead of the country's departure from the EU. [nL4N1WQ2YM]