Britain's FTSE hits 2-month low, Admiral slumps

* FTSE 100 index falls 0.4 percent

* Admiral falls 6.7 percent after update

* Aviva (Other OTC: AIVAF - news) falls on concerns about turnaround plan

By Atul Prakash and Tricia Wright

LONDON, July 9 (Reuters) - Britain's top share index fell for a third straight session to a two-month low on Wednesday, with UK car insurer Admiral sinking after a downbeat trading update.

Shares (Frankfurt: DI6.F - news) in Admiral dropped 6.7 percent, making it the top decliner on the blue-chip FTSE 100 index, after the company said revenues fell in the first half of the year and there was no firm evidence of a return to growth in UK car insurance premiums.

The company said it planned to launch its first ever bond, of up to 200 million pounds ($340 million), to diversify its capital base and help it prepare to meet Solvency II regulations in 2016.

Oriel Securities repeated its "sell" rating on the stock, while Berenberg said a likely fall in margins was not reflected in current consensus earnings forecasts.

"The market will be surprised that Admiral sees a need to raise debt," Berenberg analyst Peter Eliot, said.

"With the company forecasting falling margins and showing falling turnover, we believe these earnings forecasts will have to come down."

Trading volume in Admiral was robust, with 144 percent of its 90-day daily average volume recorded by midday, against just 29 percent for the FTSE 100 index.

Aviva was another big casualty, off 3.7 percent. The UK insurer said it aimed to double the amount of excess cash it generates during the next stage of a turnaround plan, but its shares fell on concerns the plan did not go far enough.

The UK benchmark index was down 0.4 percent at 6,709.35 points by 1025 GMT, having suffered its biggest one-day percentage fall since March on Tuesday, when it fell 1.25 percent.

"It feels like there's really negative sentiment; people are worried about earnings... I think we'll see a couple of days of selling," Joe Rundle, head of trading at ETX Capital, said.

Airlines, which slid in the previous session following a profit warning from Air France-KLM (Other OTC: AFLYY - news) , recovered some ground as traders deemed the weakness to be overdone.

EasyJet (Other OTC: EJTTF - news) climbed 3.4 percent to top the FTSE 100 leader board, while British Airways owner International Consolidated Airlines Group rose 1.3 percent.

While U.S. aluminium company Alcoa (NYSE: AA - news) kicked off the latest reporting season with quarterly results that beat analysts' expectations, investors were doubtful that would be enough to give a big fillip to the FTSE, hovering around multi-year highs.

"There's been increasing caution ahead of the earnings season ... It needs to be a fairly strong season ... for indexes to maintain their current strength," Richard Hunter, head of equities at Hargreaves Lansdown (LSE: HL.L - news) , said.

Also weighing on the FTSE 100 were stocks trading without the attraction of their latest dividend, namely Coca-Cola HBC AG and Next. They knocked 1.06 points off the index. (Reporting by Atul Prakash; Editing by Ruth Pitchford)