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Weaker energy shares drag Britain's FTSE lower

* FTSE 100 index falls 0.1 percent

* Energy shares track weaker oil prices

* Tesco falls, sees tough economic conditions

By Atul Prakash

LONDON, Oct 3 (Reuters) - Britain's top share index edged lower on Wednesday, with weaker oil prices putting pressure on energy stocks, while retailers such as Tesco

fell after the supermarket operator said tough economic conditions were likely to persist.

Tesco underperformed the wider market and fell 1.3 percent. Britain's biggest retailer said it had ended 18 months of underlying sales declines, but said that consumers' disposable incomes were squeezed by government austerity measures and tough conditions were likely to continue.

Energy shares also came under pressure as crude prices fell on persistent concerns about global oil demand. The UK energy index

fell 0.2 percent, while Royal Dutch Shell

dipped 0.3 percent.

At 0854 GMT, the FTSE 100 index

was down 5.35 points, or 0.1 percent, at 5,804.23, after slipping 0.2 percent in the previous session.

Analysts said that recent economic data had been mixed and it could be risky to have an extreme positioning at a time when a lot of uncertainties persisted.

"There are big risks in both directions for the outlook for economic growth. On that basis, we think that a balanced portfolio of cyclicals and defensives is the right way to address this situation," Robert Parkes, equity strategist at HSBC Securities, said.

"Any signs that the macroeconomic recovery is starting to see some traction will be well received by the market. We like banks and think that the sector offers a compelling value opportunity. We also like insurance, energy, telecoms and utility sectors as they are likely to offer good value in the next six to 12 months."

The UK banking sector

rose 0.3 percent on expectations that the sector will outperform the market following stimulus measures introduced by central banks.

Miners

were up 0.2 percent after falling earlier on the release of a purchasing managers' index for China's services sector, which fell in September to its lowest in nearly two years.

Analysts said that the sector had potential to gain in the medium term as an improvement in global economic activity could lift demand for raw materials.

The weakness that the FTSE exhibited at the end of last week appears to have affected investor confidence and although it bounced on Monday that looks more like beginning-of-quarter buying rather than any intrinsic belief that the market is heading higher.

Charts showed that the FTSE 100 index was still witnessing a rising trend, and had potential to advance further in the near term.

"At current levels, the FTSE 100 index is still flirting with its short-term uptrend and 50-day moving average," said Bill McNamara, technical analyst at Charles Stanley.

"A drop through that level would raise serious questions about the bull case for UK stocks."

The market showed little reaction to data showing Britain's service sector growth slowed in September and services providers shed jobs for the first time in 10 months.

(Editing by Susan Fenton)

((atul.prakash@reuters.com)(+44 20 7542 6189)(Reuters Messaging:)(atul.prakash.thomsonreuters.com@reuters.net))

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