By Sudip Kar-Gupta
LONDON (Reuters) - The FTSE fell to one-month lows on Thursday as voting got underway in what is set to be one of the country's closest national elections in decades.
With the result uncertain, the vote could yield a weak government, push the world's fifth-largest economy a step closer to leaving the European Union and stoke Scottish desires for secession.
The blue-chip FTSE 100 index, which hit a record high of 7,122.74 points last month, was down 1.4 percent at 6,834.69 points going into the middle of the trading session, marking its lowest level since the start of April.
The pull-back in the FTSE, which remains up by around 4 percent since the start of 2015, was similar to other declines on European markets on Thursday, with Germany's DAX down 1.2 percent while France's CAC fell 1.9 percent.
Opinion polls put Prime Minister David Cameron's right-wing Conservatives neck-and-neck with the opposition left-wing Labour party, while the Scottish National Party (SNP) could emerge as the third-biggest party.
A further risk stems from the Conservatives promising a referendum on Britain's membership of the European Union by the end of 2017, if they win. The polls show that no one party is on track to win an overall majority, making another coalition government the likeliest outcome.
Uncertainty over the result has impacted sterling more than stocks, which have been buoyed by a British economic recovery and record low interest rates.
Nevertheless, some traders said the risk of a 'hung' parliament -- one in which no single party can command a majority in parliament -- was weighing on the FTSE 100.
The FTSE 100 Volatility Index, which typically rises as investors grow more uncertain about the economic climate, ticked higher on Thursday.
"Given the rally we've had so far this year, you could not say that the mood is too alarmist over the election outcome. However, the risk of a hung parliament is causing people to sell out a bit to cash in on the rally," said Charles Hanover Investments' partner Dafydd Davies.
MORRISONS FALLS
Shares in supermarket operator WM Morrison fell 6.4 percent, making them the worst performers on the FTSE 100, after the company reported deteriorating sales.
Amongst stocks gaining ground, insurer RSA rose 1.4 percent after reporting a small rise in its net written premiums
Data centre provider Telecity, which is in the FTSE 250 mid-cap index, also rose 20 percent after entering takeover talks with Equinix Inc (NASDAQ:EQIX).
Kyri Kangellaris, director at Horizon Stockbroking, expected the FTSE to fall over the next month or so as the country's politicians sought to form a new coalition government, but for the market to then recover again.
"Another coalition government is the most likely outcome. The market will drift off while there is uncertainty over the make-up of that coalition, but once it is formed, the market should start to move higher again," he said.