UK's FTSE ends strong first quarter with sharp drop

* FTSE 100 down 1.7 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 detail, quote)

By Alistair Smout

LONDON, March 31 (Reuters) - Britain's top share index fell sharply on Tuesday, hindered by a drop in tobacco and commodity companies, but was still headed for its best quarterly gain since 2013 even as it ended March with a whimper.

The FTSE was down 115.11 points, or 1.7 percent, at 6,776.32 points at 1318 GMT but remained up 3.2 percent this year, heading for its biggest quarterly gain since the end of 2013.

Consumer staple stocks trimmed nearly 24 points off the blue-chip FTSE 100, weighed down by a 3.7 percent drop in Imperial Tobacco (LSE: IMT.L - news) and a 2.8 percent fall in British American Tobacco.

The sector is concerned that a proposed merger of U.S. peers Reynolds and Lorillard (NYSE: LO - news) might fall through. Imperial would 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) .

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

Mining, oil and other commodity-related stocks took 27 points off the index, as commodity prices were pressured by a stronger dollar.

The falls came in thin volumes, of just half of the 90-day average trade with 2-1/2 hours to go in the session, ahead of a four-day holiday weekend starting on Friday.

Despite a decent quarterly rise, the London index has lagged bigger gains in its euro zone counterparts, which were boosted by European Central Bank stimulus measures and are less exposed to commodity stocks.

The FTSE 100 was supported by Kingfisher, Europe's biggest home improvement retailer, which was up 3.5 percent, the top FTSE 100 riser.

It said it would 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. "How it will work out looks unclear and is certainly likely to take quite a long time," analysts at Banco Espirito Santo said, retaining a "sell" rating on the stock. ($1 = 0.6767 pounds) (Editing by Tom Heneghan)