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UPDATE 2-Prospect of avoiding no-deal Brexit boosts UK-focused shares

Muvija M

* FTSE 100 down 0.1%, FTSE 250 up 0.5%

* Exporters drag down blue-chip index

* Midcap office space provider IWG at record high

* Exporters fall as pound gains (Updates with closing prices, recasts)

Aug 27 (Reuters) - Promises from Britain's opposition parties to avert a no-deal Brexit led to gains for the domestically focused midcap index as well as blue-chip holiday companies and airlines, although gains in the local currency weighed on the exporter-heavy FTSE 100.

The FTSE 250 added 0.5% with gains across all but one sector, tracking gains in sterling as some lawmakers vowed to try and pass a law to prevent Britain tumbling out of the European bloc without a deal at the end of October.

However, the FTSE 100, which earns more than two-thirds of its profits abroad, gave up 0.1% and underperformed its European peers who got a lift as Italy's Democratic Party made progress in forming a government with the anti-establishment 5-Star movement.

British housebuilders, typically more vulnerable to any economic hit to the UK, jumped nearly 2% to their highest level in a nearly a month. Travel and related firms including TUI and British Airways owner IAG also gained.

Investors clung on to hopes that a no-deal exit from the EU could be averted as parliament is set to come back from its summer break next week.

The opposition parties are gearing up for a battle with Prime Minister Boris Johnson, who has pledged to take Britain out of the European Union on Oct. 31, with or without an exit agreement.

"While this may seem a plausible possibility, it ignores the fact that to prevent the UK leaving the EU without a deal MPs (members of parliament) still only have one plausible option and that is to revoke article 50," CMC Markets analyst Michael Hewson wrote, referring to Britain's notification of withdrawal.

On the trade front, despite U.S. President Donald Trump's prediction of a trade deal with China after positive gestures by Beijing, traders still awaited more details after tit-for-tat tariffs weighed down financial markets last week.

While Trump repeated his assertion that Chinese officials had contacted U.S. trade counterparts offering to resume negotiations, China has declined to confirm that.

"The number of twists and turns in the trade dispute, particularly more recently, have made the markets incredibly challenging to trade," London Capital Group analyst Jasper Lawler said.

Among news-driven moves, serviced offices provider IWG scaled a life-time high with a 4% rise and was among the biggest boosts to the midcap index, after Sky News reported over the weekend that the company was planning to list its U.S. arm in New York for 3 billion pounds.

Carpetright surged 11% as its biggest shareholder, Meditor Capital Management, is set to buy the retailer's 40.7 million pound line of credit from its lenders. Peel Hunt analysts said the news took away any uncertainty pertaining to the company's refinancing. (Reporting by Muvija M in Bengaluru; Editing by Arun Koyyur, Bernard Orr and Peter Graff)