UPDATE 10-Britain's pound sinks after election shock, lifting main FTSE shares


* Sterling falls as much as 2.5 pct vs dollar

* UK currency hits lowest against euro since November

* Internationally focused FTSE 100 climbs, mid-caps drop

* Gilt yields steady

* To see a Reuters interactive graphic on the election polls and results, click on http://tmsnrt.rs/2q7tC48 (Recasts, adds utilities, updates prices)

LONDON, June 9 (Reuters) - Britain's pound tumbled on Friday, lifting the country's main FTSE share index, after an election that denied any party a majority in parliament and fomented a sense of political chaos just days before Brexit talks begin.

Prime Minister Theresa May said she would form a government with help from Northern Irish unionists, despite having failed to win the stronger mandate she had sought to conduct exit talks with the rest of the European Union.

The surprise result raised questions about how Britain will advance with its plan to leave the EU. It sent the pound to eight-week lows against the dollar and its lowest levels in seven months versus the euro.

"The strong Brexit mandate has not been achieved, which you could argue is slightly negative for sterling in some ways, because if were going to go ahead with Brexit you want to have a strong negotiating hand," said Altana currency fund manager Ian Gunner, in London.

"But the flip side of that is that maybe a hard Brexit is less on the table now and we go to a soft Brexit, which is sterling supportive. So there's a lot of uncertainty, but the downside for sterling in this is not completely obvious."

London's main FTSE 100 stock index, composed of multinational companies that largely earn in foreign currency and therefore benefit when the pound falls, climbed as much as 1.3 percent, before easing back to trade up 0.7 percent on the day as the pound recovered a little.

The more domestically focused FTSE 250 index, meanwhile, whose constituents are vulnerable to sterling weakness, fell 0.3 percent.

Housebuilders suffered and gold miners climbed as investors rushed to safety and ditched stocks more exposed to domestic instability. Shares in some British utilities rose on diminishing concerns that energy prices would be capped, as planned by the Conservatives. United Utilities and SSE were both up 0.2 percent.

Challenger banks Metro , OneSavings and Aldermore, which analysts said were most sensitive to domestic growth, fell particularly sharply. Blue-chip bank RBS also fell.

"UK equities are likely to fare better, in our view, helped by currency depreciation," said Salman Ahmed, Chief Investment Strategist at Lombard Odier Investment Managers.

"However, we believe that upside potential remains capped."

British 10-year gilt yields were flat at 1.04 percent as investors bet on political uncertainty keeping Bank of England rates on hold for longer.

"Given the degree of uncertainty that's been unleashed by this election about what will happen next with the Brexit negotiations and how stable this government will be, the prospect of the Bank of England raising rates is pretty much non-existent. People are pushing it back to perhaps 2020," said Marc Ostwald, a strategist at ADM Investor Services.


Having slid over 2.5 percent to as low as $1.2636 in early European trade, sterling had recovered to $1.2726 by 1315 GMT, having taken some support from Northern Ireland's Democratic Unionist Party saying it would back May's Conservatives in forming a government.

That still left sterling down 1.8 percent against the dollar on the day and on track for its biggest one-day fall since October, though that move was dwarfed by an almost 8 percent dive the day after last June's EU referendum.

The pound was almost back to where it had been trading before May called the election on April 18 gave it a boost.

The one-month sterling-dollar risk reversal, a measure of the balance of bets on the pound rising or falling in the next month, had touched its lowest level since September overnight, indicating a bias for further sterling weakness. But it recovered to reach one-week high.

Investors' traditional views of whether the Conservatives or the opposition Labour party would be good or bad for the pound have been muddied in this election, not least by the prospect of Brexit talks due to start on June 19.

Some banks have said a high-spending Labour government could spur economic growth and cause the Bank of England to raise interest rates more quickly.

Some also argue that the Conservatives' failure to secure a majority might weaken the case for a "hard" Brexit, in which Britain leaves the EU's single market and customs union, a matter of deep concern for many businesses.

There was no indication in the options market, however, that investors were pricing in a softer Brexit.

"If you were going to seek protection via the options market...youd have to have a view on how quickly that would happen you have to pick a maturity for your option and thats very unclear," said Gunner.

UK credit default swaps (CDS) - which reflect the cost of buying protection against a government defaulting - were trading around their highest since late April. (Reporting by Noel Randewich, Richard Leong, Jennifer Ablan, Megan Davies and Dion Rabouin in NEW YORK, Patrick Graham, Jemima Kelly, Helen Reid and David Milliken in LONDON and Masayuki Kitano in SINGAPORE; Editing by Jeremy Gaunt and Hugh Lawson)