Britain's FTSE hits lowest in over one month, AB Foods slumps

* FTSE 100 down 1.1 percent

* AB Foods drops after earnings update

* Financials also sold off (Recasts, adds detail and updates prices at close)

By Kit Rees

LONDON, Sept 12 (Reuters) - UK shares closed at their lowest level in more than one month, led lower by a slump in AB Foods , as stocks and bonds were sold off across the world on nervousness about central bank policies.

Equities dropped as bond yields rose in the U.S (Other OTC: UBGXF - news) . and Asia on the back of speculation on a possible September U.S. rate hike and questions about whether central banks had reached the limit of their stimulus measures.

The FTSE 100 index was down 1.1 percent at 6,776.95 points at its close, extending its losses from Friday. The fall was in line with a broader decline on European markets, though the FTSE recovered some of its losses made earlier in the session.

"The reason to own FTSE 100 stocks, the main one over the last couple of months, is not as valid as it was when (bond)yields were lower," said James Helliwell, head of markets at the Lex van Dam Trading Academy.

"The dividend yield of the FTSE is just not as attractive compared to other equity markets, if yields are rising across the board."

The biggest faller was AB Foods, which dropped 10.6 percent and posted its biggest loss since June 27 after reporting its results.

The company raised its earnings outlook for the second time in two months, but worries concerning its Primark clothing retail business weighed.

"While the sugar outlook looks supportive for 16/17, the rather more crucial Primark performance appears light on sales, margin and space guidance. Given the recent recovery back to peak multiples ... the shares look vulnerable to profit-taking in the near term," analysts at Jefferies said in a note.

Sector peer Marks & Spencer (Frankfurt: 534418 - news) also dropped 5.5 percent.

British banking stocks were also among the top fallers, with Lloyds, Royal Bank of Scotland (LSE: RBS.L - news) and Barclays (Swiss: BARC.SW - news) all down between 2.6 percent to 3.9 percent, with analysts citing a lack of confidence in central banks as weighing on the sector.

Among the handful of gainers, pharma company AstraZeneca (Swiss: AZN.SW - news) rose 0.8 percent on the back of a supportive note from Jefferies, who upgraded their rating on the stock to a "buy" on the back of hopes for a lung cancer drug. (Reporting by Kit Rees; Editing by Dominic Evans/Keith Weir)