FTSE edges lower, British American Tobacco down on sales drop

* Blue-chip FTSE 100 falls 0.2 percent

* British American Tobacco (LSE: BATS.L - news) slips after update

* Mid-cap index gains 0.5 percent

By Atul Prakash

LONDON, Oct 22 (Reuters) - Britain's blue-chip FTSE 100 index edged lower by midday on Wednesday, with British American Tobacco knocking the most points off the benchmark after its trading update.

The maker of Pall Mall and Dunhill cigarettes said the trading environment remains challenging because of pressure on consumer disposable income worldwide, currency issues and a slow economic recovery in western Europe.

"Any company that has been operating globally, particularly in emerging markets, has been facing currency headwinds," David Battersby, investment manager at Redmayne-Bentley, said.

"BAT represents premium products and people will pay for that premium. But when you are paying one thing one day and another the other, then to maintain your revenues you have to reduce prices, which is going to affect profitability."

BAT stock was down 4 percent, making it the biggest faller on a FTSE 100 down 0.2 percent at 6,362.99 points by 1017 GMT. It's peer Imperial Tobacco (LSE: IMT.L - news) was down by 0.7 percent.

Some analysts were cautiously optimistic on the FTSE 100's outlook after its decline of more than 10 percent in four weeks before a marginal recovery late last week.

"Many traders are now talking about the prospect of a year-end rally. That is possible, though there are still some obstacles to overcome. The index is still trading below the bottom of the pattern that has been in place since summer 2012," Bill McNamara, technical analyst at Charles Stanley (LSE: CAY.L - news) , said.

"Near-term upside still looks like a realistic expectation at this point, but the FTSE no longer looks oversold and, beyond 6,400 or so, the gains are likely to be more hard-won."

The mid-cap FTSE 250, however, rose 0.5 percent, boosted by a bullish update by gambling technology business Playtech (LSE: PTEC.L - news) and bid speculation surrounding speciality chemicals maker Croda International (Other OTC: COIHF - news) .

Shares (Berlin: DI6.BE - news) in Croda rose 4.2 percent, adding to a 1.8 percent gain on Tuesday, which the Daily Mail and Daily Express newspapers attributed to talk of a 4 billion pound ($6.45 billion) offer for the company.

Playtech surged 6.8 percent after saying it was confident it would exceed current market expectations after a strong start to its fourth quarter, which followed a 29 percent rise in revenue in the preceding period.

On the downside, SuperGroup (Other OTC: SEPGY - news) , the British company behind the Superdry fashion brand, fell 4.3 percent after it named former Co-operative Group boss Euan Sutherland as its new chief executive, replacing founder Julian Dunkerton. (Additional reporting by Francesco Canepa; Editing by David Goodman)