UPDATE 2-UK stocks recoil as Brexit optimism fades; buyout spurs Sophos

* FTSE 100 down 0.5%, FTSE 250 down 0.6%

* UK indexes ease after Friday's rally

* Sophos jumps on buyout deal, leads peer Avast higher

* Royal Mail drops as threat of Christmas strike looms (Adds details, quotes, graphic, updates to closing prices)

By Shashwat Awasthi

Oct 14 (Reuters) - London-listed companies with exposure to the domestic economy retreated on Monday as last week's euphoric optimism gave way to doubts over whether a timely Brexit deal could be clinched, while cybersecurity firm Sophos surged 36% after a buyout offer.

The FTSE 250 ended slightly off the day's lows but still shed 0.6%, handing back part of the more than 4% gain it had recorded in the previous session which was its best in nearly a decade.

Britain and the European Union said over the weekend that a lot more work would be needed to secure a Brexit agreement.

JP Morgan's UK domestic plays index, tracking about 30 UK stocks that make all or most of their revenue at home, pulled back nearly 1%. It had jumped almost 8% on Friday, its best day since the basket was created nearly three years ago.

Blue-chip banks like Lloyds and Barclays and housebuilders skidded, dragging the FTSE 100 0.5% lower.

"On balance I feel the situation here is still fairly unpredictable... I think it's far from clear we have a pathway yet," said Paul O'Connor, head of the UK-based Multi-Asset Team at Janus Henderson.

The main index was also hurt by a drop in miners after disappointing imports and exports data from top metals consumer China.

Mid-cap Sophos Group scaled its highest level in more than a year at 586.8 pence, after private equity firm Thoma Bravo said it would take the company private in a 583 pence per share deal.

Shares of its peer Avast also rose 2.6%.

Sentiment around the U.S.-China trade situation also tempered somewhat after a rally in global stocks last week on signs of progress in negotiations that culminated with President Donald Trump outlining the first phase of a deal and suspending a threatened tariff hike.

"We welcome it but it's a very fragile truce. The fact that it wasn't written down is the most important thing. It shows what a challenge it is to converge on a hard agreement," O'Connor said.

Ad firm WPP, which lost 4% in the previous session after French rival Publicis cut its sales view for the second time, ended 2.8% higher.

Royal Mail, relegated to the FTSE 250 earlier this year, slipped 2.4% after a report https://www.thetimes.co.uk/article/royal-mail-boss-rico-back-faces-threat-of-christmas-strike-chaos-d3mm0gf2j that the company was facing the threat of an employee strike over Christmas.

Car dealership chain Pendragon, whose stock has nearly halved in value this year, climbed 10%. Automotive News reported https://europe.autonews.com/retail/pendragon-names-us-retail-veteran-berman-interim-ceo Pendragon had named interim Executive Chairman and former AutoNation COO Bill Berman as interim CEO.

(Reporting by Shashwat Awasthi in Bengaluru, additional reporting by Josephine Mason in London; Editing by Bernard Orr and Ed Osmond)