UK's FTSE slips as Tesco loses ground

* FTSE 100 down 0.3 pct, Tesco (Xetra: TCO.DE - news) among worst performers

* Ex-dividend stocks take around 5.5 points off FTSE

* Tesco falls after drop in underlying sales

* Lingering bid talk lifts Smith & Nephew (LSE: SN.L - news)

By Sudip Kar-Gupta

LONDON, June 4 (Reuters) - Britain's top equity index edged lower on Wednesday, with Tesco weighing on the market after the supermarket retailer posted its worst quarterly UK sales drop in 40 years.

The blue-chip FTSE 100 was down by 0.3 percent, or 23.37 points, at 6,812.93 by the middle of the trading session.

A 1.1 percent fall in Tesco provided one of the biggest setbacks for the FTSE, after the retailer's figures ratcheted up the pressure on boss Phil Clarke to show his turnaround plan can counter challenges in the grocery sector.

Brokerages Cantor Fitzgerald and Shore Capital both kept "sell" ratings on Tesco, but Strand Capital managing director Kyri Kangellaris said the fall in Tesco's shares made it worth buying as a long-term investment.

"Tesco is currently out of favour with the fickle UK consumer, but sentiment can change quickly," said Kangellaris.

A strengthening in sterling after data showed an expansion in Britain's services sector also prevented the FTSE from breaking into positive territory, since a strong pound can curb British exports.

Stocks going ex-dividend, or losing their entitlement for the next payout, took around 5.5 points off the index.

Bucking the weaker overall market was medical devices manufacturer Smith & Nephew (S&N), which rose 2 percent.

Traders attributed S&N's gains to a research note from JP Morgan (Other OTC: MGHL - news) , whose analysts said speculation of a possible bid from rival Stryker (Berlin: SYK.BE - news) could provide support for the stock over the next three to six months.

JP Morgan (Other OTC: JPYYL - news) also mentioned upbeat comments from S&N's management, who said the company could win market share due to disruption caused by sector consolidation, such as Zimmer's bid for Biomet.

The FTSE hit a peak of 6,894.88 last month, its highest level since December 1999, but has so far failed to break the 6,900 level and some traders saw the index making little near-term progress unless it gets past that barrier.

"If the FTSE remains above 6,770, then the trend is still positive, but it needs to get over 6,900 to find new space for another rally," said Carlo Alberto de Casa, senior market analyst at online brokerage ActivTrades. (Additional reporting by Atul Prakash; Editing by David Holmes)