Tobacco stock drop takes shine off strong quarter for UK's FTSE

* FTSE 100 down 0.9 pct

* Set for largest quarterly gain since Q413

* Imperial, BAT down on U.S. merger concern

* Kingfisher (LSE: KGF.L - news) up as investors welcome store closures (Recasts, adds quotes, detail)

By Alistair Smout

LONDON, March 31 (Reuters) - Britain's top share index turned lower on Tuesday, hindered by a drop in tobacco companies, but was still headed for its best quarterly gain since 2013, underpinned by a rally in Kingfisher after its trading update.

Consumer staple stocks trimmed nearly 16 points off the blue-chip FTSE 100, weighed down by a 2.4 percent fall in British American Tobacco (LSE: BATS.L - news) and a 2.6 percent drop in Imperial Tobacco (LSE: IMT.L - news) .

The sector was pegged back by concern that a proposed merger of U.S. peers Reynolds and Lorillard (NYSE: LO - news) might fall through. Imperial is set to acquire assets from Reynolds if the deal happens, while BAT has a stake in Reynolds.

Imperial Tobacco hit record highs earlier this month and is up 13 percent since the deal was announced.

"The possibility of regulatory intervention to this deal is affecting the sector, and makes the outlook more cautious," said Chris Beauchamp, market analyst at IG (LSE: IGG.L - news) .

"A lot of the recent price rises have been built on the idea that the deal would go through."

Traders said that bets on a rate hike in the United States, which helped the dollar towards its biggest quarterly rise since 2008, were also denting the performance of high dividend payers such as consumer staples.

Mining and oil-related stocks turned lower, as commodity prices were pressured by a stronger dollar. A firm greenback makes dollar-denominated commodities costlier for holders of other currencies.

The FTSE was down 61.90 points, or 0.9 percent at 6,829.53 points at 1053 GMT, although it remained up 4 percent this year and was set for its biggest quarterly gain since the end of 2013.

The London index, however, has lagged bigger gains in its euro zone counterparts, which were boosted by new stimulus measures from the European Central Bank.

The FTSE 100 was supported by a rise in Kingfisher, with Europe's biggest home improvement retailer up 3 percent, the top FTSE 100 riser.

It said it planned to close about 60 underperforming stores in Britain while returning 200 million pounds ($295.56 million) to investors during the 2015-16 year.

The new Chief Executive Veronique Laury has been charged with turning the firm around, and analysts said there was still work to be done.

"We found the strategy less decisive than we had expected, albeit logical in most respects and sensible in terms of not over-promising," analysts at Banco Espirito Santo said, retaining a "sell" rating on the stock.

"The group-wide reorganisation is why the new CEO has been put in place... How it will work out looks unclear and is certainly likely to take quite a long time."

Among mid-caps, outsourcing company Mitie fell 8.3 percent after saying its full-year operating profit was likely to be slightly lower than forecast due to cuts in local government spending. ($1 = 0.6767 pounds) (Editing by Crispian Balmer)