BT knocks FTSE, Smith & Nephew down on fading takeover prospects

* FTSE 100 down 0.3 pct

* BT falls on fears over jump in pension deficit

* Medtronic (NYSE: MDT - news) buys Covidien (NYSE: COV - news) , quashing SN deal hopes

By Tricia Wright

LONDON, June 16 (Reuters) - Britain's top share index slipped on Monday as concerns about a large increase in its pension deficit hit BT Group (LSE: BT-A.L - news) and Smith & Nephew (LSE: SN.L - news) fell as hopes faded for a takeover of the the medical technology company.

BT fell 2.6 percent, the biggest individual drag on the UK benchmark, with traders citing a Sunday Times report which said that a three-yearly review of the telecoms firm's 319,000 member scheme next month was likely to show a 50 percent jump in the deficit to about 6 billion pounds ($10.1 billion).

This would force BT to increase its contributions and potentially reduce its firepower in the fight with BSkyB over sports broadcast rights, the newspaper said.

Traders, however, shrugged off the share price weakness.

"We see this as an overreaction and argue that (6 billion pounds) is too high. The investment case for BT remains strong and we see this as a good entry point into a company that has the opportunity to reward patient investors," said Atif Latif, director of trading at Guardian Stockbrokers.

Smith & Nephew fell 1.2 percent after, the world's largest standalone medical device maker Medtronic agreed to buy Dublin-based Covidien Plc for $42.9 billion and relocate to Ireland (Other OTC: IRLD - news) , to secure a lower corporate tax rate.

Earlier this month, Bloomberg reported that Medtronic was in the running to buy Smith & Nephew, which specializes in hip and knee implants, in a move to help lower its taxes.

Stryker (Berlin: SYK.BE - news) had already ruled out a bid for the firm, shares in which gained a third between April and June on the prospect of a takeover.

"If someone thought Smith & Nephew were a decent takeover target, then this just takes another interested buyer out of the market," said Toby Morris, senior sales trader at CMC Markets.

"We've seen a couple of deals that haven't materialised, and if you've got people hanging on for these rumours and there isn't anything else on the horizon, it's a good time to get out of them."

The broader FTSE 100 was down 20.29 points, or 0.3 percent, at 6,757.56 points by 1144 GMT, extending last week's loss of 1.2 percent.

($1 = 0.5956 British Pounds) (Additional reporting by Alistair Smout; Editing by Catherine Evans)