Pharma shares knock FTSE as new U.S. tax rules dent M&A hopes

* FTSE 100 drops 1.5 percent

* Heavyweight drug sector down xxx pct on U.S. tax rules

* Tate & Lyle (LSE: TATE.L - news) down 16.3 pct after profit warning

By Tricia Wright and Francesco Canepa

LONDON, Sept 23 (Reuters) - Britain's top shares fell on Tuesday, dragged down by healthcare shares as new U.S. tax rules dented the takeover appeal of companies such as Shire and AstraZeneca (NYSE: AZN - news) .

Market sentiment was also depressed by surveys showing French business activity contracting again in September and Germany's manufacturing sector growing at its slowest pace since June 2013, casting a shadow over euro zone recovery prospects.

The U.S. Treasury Department announced new rules, effective immediately, which will reduce the tax benefits available to companies which strike tax "inversion" deals. Such deals allow firms to escape high U.S. taxes by reincorporating abroad.

Britain's more favourable tax regime has been a major factor fuelling U.S. takeover interest in London-listed companies, particularly in the healthcare sector.

"This is a big impact and certainly it will put a cap on a lot of M&A or takeover activity... If you look over the last few months a lot of what has been driving the FTSE has been this M&A activity," IG (LSE: IGG.L - news) analyst Brenda Kelly said.

The FTSE 350 Healthcare sector index fell about 3 percent and has risen about 20 percent this year, outpacing all other sectors in the large-cap FTSE 350 index.

Drugmaker Shire, which is being acquired by AbbVie (Xetra: 4AB.DE - news) 's , tumbled 6.5 percent. AstraZeneca, which turned down a bid from Pfizer (NYSE: PFE - news) this year, fell 5 percent and medical devices manufacturer Smith & Nephew Plc (LSE: SN.L - news) , also tipped as a U.S. bid target, shed 3.8 percent.

The broader FTSE 100 was down 99.16 points, or 1.5 percent, at 6,674.47 points by 1148 GMT, extending its retreat from this month's 14-1/2 year high of 6,904.86.

Mid-cap sweetener maker Tate & Lyle fell 16.3 percent after it said its annual profit would be hit by significant disruption to its supply chain and increased competition for its Splenda sucralose sweetener.

This marks the second high-profile profit warning in Britain this week, but analysts saw these as isolated events that had little broader market significance.

Supermarket retailer Tesco (Xetra: 852647 - news) suffered its biggest one-day percentage drop since January 2012 on Monday -- down 11.6 percent -- as it cut its profit forecast for the third time in two months after finding a fault in its accounts.

"Tate with its sucralose market and Tesco with its accounting issues -- they are very, very stock specific and I don't think there's necessarily a big read-across to the performance of the UK corporate sector on the back of those two announcements," Exane BNP Paribas global head of equities strategy, Ian Richards, said. (Editing by Louise Ireland)