FTSE turns red on inflation fears, A&L writedowns

By Rebekah Curtis

LONDON, May 13 (Reuters) - British blue-chip shares reversed early gains to drop by more than 1 percent by midday on Tuesday, as surging UK inflation data cast shadows over the UK economic outlook and credit-related writedowns hit Alliance & Leicester.

By 1030 GMT, the FTSE 100 .FTSE was down 61.3 points at 6,159.3 points, as shares across Europe, earlier supported by overnight gains in U.S. and Asian markets, gave up their early advances.

The ratio of declining stocks to advancers on the FTSE was about nine to one.

Britain's consumer price inflation rate leapt by its biggest amount in nearly six years, to a full point above the central bank's 2 percent target, as food and fuel bills soared.

That put Bank of England Governor Mervyn King a whisker away from having to write to the government explaining how he plans to bring inflation back to target, and will likely severely dent expectations of further interest rate cuts.

"The concern is we are now about to enter a period of high inflation and much slower growth," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"But obviously, by not cutting interest rates any more, the risk is that the UK economy goes through a period of even slower growth and possibly flirts with recession, so what we can say is that the (Bank's) Monetary Policy Committee is probably facing its toughest period since it was instituted.

"It's absolutely important that the Bank of England does not blink, it needs to hold its nerve."