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FTSE ends lower; Rolls-Royce slides on plane order cancellation

Britain's top share index fell on Wednesday, pressured by stocks going ex-dividend and a sharp decline in Rolls-Royce following the cancellation of a major plane order.

Rolls-Royce dropped 5.5 percent, the top faller in the blue-chip FTSE 100 index, after Dubai's Emirates scrapped a $16 billion order for Airbus A350 planes that are fitted with engines from Rolls-Royce.

British Airways owner IAG also put pressure on the market, sliding 3.1 percent after rival Lufthansa said it would not reach its profit targets for the next two years as competition was suppressing prices on its main European and U.S. routes. Lufthansa shares slumped 14.2 percent in Frankfurt.

"Airlines are going to face a tough time as competition in the sector is increasing. Lufthansa's profit warning is a reminder that the situation is not going to improve in the near future and their margins might come under further pressure," David Battersby, investment manager at Redmayne-Bentley, said.

"However, I continue to be positive on the market and think that 7,000 for the FTSE 100 by the end of the year is quite possible. There are a lot of UK companies which are priced attractively and giving good dividends."

The benchmark FTSE 100 index ended 0.5 percent, or 34.68 points, lower at 6,838.87.

Stocks trading without the attraction of their latest dividend, namely Johnson Matthey and Vodafone, accounted for the majority of the FTSE 100's falls, knocking 8.24 points off the index. Vodafone dropped 4.5 percent, while Johnson Matthey fell 1.3 percent.

Analysts said that investors were losing faith in the idea that the index, which is less than 2 percent off its record high set in December 1999, will reach new highs in the near term.

"We think the FTSE 100 feels quite toppy up here - we are bullish in the medium term but at the moment, with summer approaching and volumes continuing to be light, we feel as if there could be some profit taking around these levels," said Mark Ward, Sanlam Securities' head of trading.

Alpari analyst Craig Erlam said a break below Tuesday's low of 6,835 would provide the first indication that the index was headed back towards its 6,800-range lows.

Frothy valuations are preventing investors from putting more money to work in equities. The FTSE 100 is trading on a 12-month forward price/earnings ratio of 13.7 times, against its 10-year average of 11.7 times, Thomson Reuters Datastream shows.

Some analysts said the index will fail to make much headway until the interim reporting season gets underway, around mid-July.

"Given the steady grind higher recently we're bumping at the top of the valuation range. I just think we're still at the point where we're waiting for the earnings to support that," said Peel Hunt equity strategist Ian Williams.

Among gainers, supermarket retailer J Sainsbury rose 1 percent after its sales update was seen as not as bad as expected. Sales at its stores open more than a year fell 1.1 percent, excluding fuel, in the 12 weeks to June 7, against a decline of 3.1 percent in the fourth quarter. Analysts had forecast a drop of 0.5-1.5 percent. (Additional reporting by Tricia Wright; Editing by Larry King/Ruth Pitchford/Susan Fenton)

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