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UPDATE 2-Worries over global trade, Italy lead FTSE 100 lower

By Shashwat Awasthi and Indranil Sarkar

* FTSE 100 down 0.9%, FTSE 250 down 0.5%

* Trade worries, Italy politics weigh on main index

* Firmer sterling hurts exporters

* BHP falls after warning on demand

* Sainsbury's among handful of blue-chip gainers (Adds news items, analyst comment, updates to closing prices)

By Shashwat Awasthi and Indranil Sarkar

Aug 20 (Reuters) - London's main index ended firmly in the red on Tuesday after new U.S.-China trade jitters and political instability in Italy took down heavyweight firms across sectors, while exporter stocks dipped as the pound gained after German Chancellor Angela Merkel's comments on the Brexit process.

The FTSE 100 gave up earlier gains and shed 0.9%, though investors still hoped for fresh stimulus from central banks and governments to beat back the risk of recession. The FTSE 250 lost 0.5%.

Asia-focused banks such as HSBC dragged the blue-chip index lower after the U.S. affirmed its tough stance on Chinese telecoms giant Huawei, which investors saw as a risk of further escalating tensions, while oil majors Shell and BP also slipped.

UK-focused banks such as Barclays also dropped more than 1% as Italian Prime Minister Giuseppe Conte resigned after coalition leader Matteo Salvini had called for snap elections earlier this month.

"The Italian political news isn't a shock, but nonetheless it chips away at investor confidence," CMC Markets analyst David Madden said.

The main index, which is on course for its worst month in four years, fell after two sessions of solid gains. It had incurred steep falls last week when signs from the bond market that in the past have pointed to recession damaged global markets.

Constituents of the FTSE which book a major chunk of their earnings in dollars, including Unilever and Diageo , fell as sterling advanced after Merkel called for practical solutions regarding the post-Brexit Irish border.

"There could be a lot more negativity for the pound as September unfolds," Markets.com analyst Neil Wilson warned, as Prime Minister Boris Johnson attempts to convince the European Union to tweak a Brexit deal agreed with his predecessor Theresa May or risk a no-deal divorce.

In news-driven moves, mining heavyweight BHP shed 1.7% as a warning that global economic headwinds could hit demand for iron ore and copper took the shine off its largest annual profit in five years.

But supermarket chain Sainsbury's climbed 3% after data showed it recorded the smallest sales decline among Britain's big four grocers in the latest 12-week period. Rival Tesco slipped 1.8%.

Mid-cap pub operator Mitchells & Butlers surged 8% to a more than 3-1/2 year high after Canaccord Genuity upgraded the stock following recent buyouts of peers Greene King and Ei Group. (Reporting by Shashwat Awasthi in Bengaluru; editing by Patrick Graham and Ed Osmond)