Shares in Britain's top companies closed near two-month lows on Monday after oil prices raced to all-time highs and threatened to fuel inflation, although oil major BP and other oil stocks rose. The FTSE 100 share index ended down 17.3 points, or 0.4 percent, at 4,896.7, erasing almost all of Friday's rise but recovered from an earlier fall to a fresh two-month intraday low at 4,877.0.
The index's February rally came unstuck as oil prices surged once again and as investors came to terms with the prospect of a more aggressive rate-tightening cycle in the United States.
Heavyweight, activity-traded sectors including banks, drugs and insurers accounted for most of the falls, with the three sectors wiping about 15 points off the leading index.
"Oil prices have paid a major role in recent weakness," said Robert Parkes, UK equity strategist at HSBC Securities. "People are concerned now that we're seeing a bit of cost-push inflationary pressure. If rates move higher because of that reason rather than because of growth, then people will become concerned."
But BP, Europe's biggest company, added just under 7 points of FTSE 100 upside after the company raised production in the first quarter and said it was on course to hit full-year output targets. Its shares rose 1.4 percent.
"BP is on track with its strategic targets, with controlled investment and surplus cash flow being used for significant share buy backs," said Barclays Stockbrokers in a note. "BP remains our preferred investment in the sector given its better fundamental outlook and enhanced value creation strategy."
Other oil companies were in demand after mid-tier exploration company Burren Energy reported a surge in annual profits and gave an upbeat outlook for the year, pushing up its shares 3.1 percent.
Rival oil explorers Tullow Oil and Paladin Resources added more than 4 percent, buoyed by Burren's confident assessment of its prospects.
Elsewhere in the sector shares in BG Group topped the list of FTSE 100 gainers with a 2.7 percent advance, supported by a positive research note from Lehman Brothers.
Talk of soggy trading during the Easter holiday weighed on several retailers, with electronics seller Dixons off by 2.6 percent and mid-cap rival Kesa off by 2.2 percent.
Meanwhile food retailers were unnerved by the threat of an escalating price war between market leaders Tesco and Asda. Dealers said William Morrison could be hardest hit by another price war, and its shares fell 1.8 percent. Tesco dipped 0.7 percent.
But persistent take-over speculation lifted some stocks, including drinks firm Allied Domecq. It gained 0.7 percent as talk flared up that US conglomerate Fortune Brands is eyeing European drinks firms, with Allied a potential target.
Gas provider Centrica rose 2 percent after ABN Amro upgraded its stance on the company to "buy" from "add" and the Sunday Times newspaper said it might be ripe for an approach from private equity firms.
Logistics firm Exel rose 1.8 percent on old talk that Deutsche Post may launch a bid for the company.
Real take-over activity flared in children's television company Hit Entertainment, whose shares jumped 11 percent after it said it had received two further take-over approaches following an agreed 489 million pound deal with private equity firm Apax, worth 300p per share. Canadian film and television studio Lions Gate and a trade and private equity team were said to be behind the approaches.
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