By Helen Reid
LONDON (Reuters) - An election upset for Prime Minister Theresa May sent Britain's major share index shooting up on Friday, feeding off a weaker currency, while housebuilders suffered losses as uncertainty about the UK's leadership grew before Brexit negotiations.
The FTSE 100 gained 1 percent after Britons dealt the governing Conservative party a punishing blow, denying May the increased mandate she had gambled on and forcing her into an alliance with Northern Ireland's DUP party to command a majority in parliament.
Individual winners and losers were largely driven by currency, and some sectors seen as particularly sensitive to Brexit instability also saw heavy losses.
But a buoyant U.S. market added fuel to British shares as investors largely shrugged off the political turmoil, with traders highlighting volume and volatility were subdued compared with the Brexit vote and U.S. election. Money managers eyed medium-term tailwinds from the shock result.
"It's not being seen as a global risk-off event, it's being seen as a domestic political event," said Caroline Simmons, deputy head of the UK investment office at UBS Wealth Management.
Sterling fell as much as 2.4 percent before recovering some of its losses. It boosted the internationally focused, exporter-heavy blue chip index, while stocks with greater domestic exposure were under pressure.
BP (LON:BP), Smurfit Kappa and Diageo (LON:DGE), which derive most of their earnings overseas, were top gainers. Housebuilders Taylor Wimpey (LON:TW), Barratt Development and Persimmon (LON:PSN) all fell 1.3 to 3.3 percent in a reaction to the domestic uncertainty.
Banks RBS (LON:RBS) and Lloyds (LON:LLOY) also weighed. Their more internationally focused peers HSBC and Standard Chartered (LON:STAN) gained.
Gold miner Fresnillo (LON:FRES) jumped more than 3 percent as investors rushed to the safe haven asset.
Large caps suffered their first weekly loss since late April, however, as hesitant trading earlier in the week took its toll.
Mid caps, which derive a larger part of earnings from the UK, pulled out of their dive with an hour of trading to go. Investors snapped up stocks that had sunk earlier as concern around economic instability swirled.
"Unless we see signs the bottom is falling out of UK consumer spending and/or the pound, these moves are an opportunity to buy a quality business trading below intrinsic value," said Gary Paulin, head of global equities at Northern Trust.
The FTSE 250 ended 0.1 percent higher.
Challenger banks Metro Bank, OneSavings Virgin Money (LON:VM), meanwhile, saw some of the sharpest falls as analysts pointed to their high gearing to domestic lending.
Pub chain Wetherspoons fell more than 3 percent, along with large-caps Whitbread (LON:WTB) and IAG (LON:ICAG), in a wobble among stocks exposed to consumer sentiment which tends to be dented by political turmoil.
Real estate investment trusts (REITs), seen as a barometer of sentiment on Brexit due to their holdings of London office space, were the biggest FTSE all-share fallers on the day.
"There's a lot of emotional trading on the back of news such as this," said Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management in Geneva. "I would guard against reading too much into these moves."
And silver linings were found as some investors, including star fund manager Neil Woodford, predicted the election would yield a softer Brexit, improving the outlook for British stocks in the medium term.