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UK's FTSE posts biggest weekly drop in 6 months, grocers slip

* Blue-chip FTSE 100 index falls 0.8 pct

* Vodafone shares fall as Liberty merger ruled out

* Caution after Greek payment delay, ahead of U.S. jobs (Updates with closing prices)

By Alistair Smout and Atul Prakash

LONDON, June 5 (Reuters) - Britain's top share index fell on Friday to post its biggest weekly drop in nearly six months, mirroring a broad sell-off in Europe, with some food retailers losing ground after Deutsche Bank (Xetra: 514000 - news) cut its estimate for the UK grocery market.

The FTSE 100 hit an intra-day low of 6,785.15 points, the lowest level in two months, and finished down 2.6 percent for the week, its poorest weekly showing since mid-December.

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Food retailers were among the biggest decliners, with Morrison and Tesco (Xetra: 852647 - news) falling 2.6 percent and 1.4 percent respectively after Deutsche Bank cut its target price for Morrison to 180 pence from 210 and for Tesco to 240 pence from 275.

Vodafone Group (Swiss: VOD.SW - news) fell 2.4 percent to trim 6.3 points off the index, as the world's second-biggest mobile operator put an end to speculation that a merger with Liberty Global (NasdaqGS: LBTYA - news) was on the cards, and said it was considering only an exchange of selected assets.

Vofadone has been supported in recent weeks by speculation that a full merger might occur. While that has been dashed, some analysts welcomed the asset swap as a more practical solution.

"We have long argued that a LBTYA acquisition of Vodafone, or indeed vice versa, was fraught with complications," RBC (Other OTC: RBCI - news) said in a note.

The blue-chip FTSE 100 index was down 54.64 points, or 0.8 percent, at 6,804.60 at the close, in line with weaker European indexes, after Greece delayed a debt payment to the IMF due on Friday and Prime Minister Alexis Tsipras demanded changes to tough terms from international creditors for aid to stave off default.

The wrangling over Greece has helped to pull the FTSE 100 down from all-time highs, despite boosts from a decisive British general election result in May and bond buying by the European Central Bank.

"UK assets have been largely swayed by forces in the euro zone since the election," said Neil Williams, Group Chief Economist at Hermes Investment Management.

"They still haven't solved the problem of monetary union bereft of economic union, and Greece proves the point nicely," he added.

"But we're not yet at the end-game for the euro zone, stimulus from the ECB will continue, and that will help to support stock markets including the FTSE." (Editing by Kevin Liffey)