UK stocks at two-week lows as rate worries deepen

By Bansari Mayur Kamdar and Sruthi Shankar

(Reuters) -UK's main stock indexes hit two-week lows on Tuesday, bogged down by fears about higher interest rates and their impact on economic growth, ahead of key policy decisions from the U.S. Federal Reserve and Bank of England this week.

The commodity-heavy FTSE 100 reversed early gains to close down 0.6% after a holiday on Monday to mark Queen Elizabeth's funeral.

The sell-off gathered pace after a weak open on Wall Street as traders positioned themselves for hefty 75 basis points interest rate hike from the U.S. central bank's Federal Open Market Committee meeting on Wednesday. [.N]

The Bank of England's policy decision is due on Thursday, with traders seeing a 70% likelihood of a similar move and a 30% chance of a 50-basis-point increase.

"The prospect of hefty rate hikes and hawkish rhetoric from the FOMC and Bank of England gives little room for optimism, with the Swedish central bank leading the way after raising rates by a full percentage point today," said Joshua Mahony, senior market analyst at online trading platform IG.

Sweden's central bank raised interest rates full percentage point to 1.75% and warned of more to come over the next six months as it sought to get to grips with surging inflation.

UK's rate-sensitive banks climbed 0.8% as two-year gilt yields leapt to their highest since October 2008 at 3.345%.

The domestically focussed FTSE 250 index fell 1.4%, also hitting a two-week low, as real estate and retail stocks each declined more than 4%.

Among single stocks, Moonpig Group Plc dropped 7.5% as the online greeting card and gifting platform reiterated its full-year outlook, while home improvement retailer Kingfisher slid 3.9% after reporting a 29.5% fall in first-half underlying profit.

Recruiting firm SThree Plc forecast a higher-than-expected annual profit, helped by continued demand for hiring in the science, technology and related sectors, sending its shares 4.1% higher.

Future Plc tumbled 17.6% after the media company confirmed a report that its chief executive was planning to step down.

(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Savio D'Souza, Sriraj Kalluvila and Richard Chang)