Britain's FTSE struggles one year on from Brexit, haunted by uncertainty

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* FTSE 100 down 0.2 pct, mid caps up 0.2 pct

* Post-Brexit performance CHART: http://bit.ly/2tAZUmx

* Dollar-earners weigh on blue chips

* Political uncertainty, inflation worries hamper rally

By Kit Rees

LONDON, June 23 (Reuters) - One year on from Britain's shock vote to leave the European Union and cracks are starting to appear in the FTSE 100's rally, as concerns on both political and economic fronts put UK shares on course for their third week of losses in a row.

The blue chip FTSE 100 index was down 0.2 percent at 7,423.94 points at 0939 GMT, while mid caps were up 0.2 percent.

UK shares were hit hard in the immediate aftermath of last June's Brexit vote, but recovered speedily as a fall in sterling boosted firms that earn revenue in foreign currencies.

While the FTSE ended 2016 up more than 14 percent, fresh political concerns stemming from a hung parliament in the general election and uncertainty around Brexit negotiations have put the brakes on UK shares this year.

Despite hitting a series of record highs along the way, British blue chips are up just 4 percent year to date with the FTSE the weakest major European market in terms of performance - in contrast the pan-European STOXX 600 has gained 7.4 percent.

"The market tries to run higher looking at the benefits from the weaker pound, but then is struck back by the reality of the fact that this is an inherently unsustainable situation," Ken (Shenzhen: 300126.SZ - news) Odeluga, market analyst at City Index, said.

Though sectors such as housebuilders, which were hit hard, have largely bounced back, investors remain concerned around firms exposed to the domestic UK economy, such as retailers.

"We expect subpar growth as Brexit bites. We see greater political instability, including a risk of early elections and a new government, but also a softer Brexit and easier policy," Morgan Stanley (Xetra: 885836 - news) 's economy and strategy team said in a note.

The picture is lacklustre in dollar terms especially, with both the FTSE 100 and mid caps roughly flat since the Brexit vote.

A depressed sterling has increased concerns around a rise in inflation, which has hit shares in British retail stocks which could come under pressure as consumers' pockets are squeezed.

Firms in internationally-exposed sectors such as miners, tobacco companies and consumer goods have been clear winners, though renewed weakness in the price of oil has dogged the FTSE 100's energy constituents.

On Friday, dollar earners were the biggest fallers, with health stocks AstraZeneca (NYSE: AZN - news) and Shire (Xetra: S7E.DE - news) , as well as Smurfit Kappa (Frankfurt: SK3.F - news) and Diageo (LSE: DGE.L - news) all down between 1.2 and 1.7 percent.

Oil heavyweight BP dropped 0.7 percent and Royal Dutch Shell fell 0.5 percent as the price of oil remained at depressed levels.

(Reporting by Kit Rees; Editing by Mark Potter)