UK's FTSE slips as Tesco tumbles

* FTSE 100 down 0.4 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 fell on Wednesday, weighed down by Tesco after the supermarket retailer posted its biggest quarterly UK sales drop in 40 years.

The blue-chip FTSE 100 was down 0.4 percent, or 24.37 points, at 6,811.78 points going into the close of the day.

Tesco's 1.6 percent fall was one of the biggest setbacks for the FTSE, after the retailer's figures ratcheted up the pressure on boss Phil Clarke to show he can counter challenges in the grocery sector.

Brokerages Cantor Fitzgerald and Shore Capital both kept "sell" ratings on Tesco.

Strand Capital managing director Kyri Kangellaris said the fall in Tesco's shares made it worth buying as a long-term investment, but Mirabaud Securities' equity research partner Steve Clayton said Tesco did not look that good a bet for now.

"So far, to our eyes, Tesco's price-cutting strategy is not benefiting the business in terms of profits or cash flow," he said.

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, losing their entitlement for the next payout, took around 5.5 points off the index.

Bucking the trend, medical devices manufacturer Smith & Nephew (S&N) rose 2 percent. Traders attributed that to a research note from JP Morgan (Other OTC: JPYYL - news) , whose analysts said speculation of a possible bid from rival Stryker (Berlin: SYK.BE - news) could support the stock over the next three to six months.

JP Morgan also mentioned comments from S&N's management that 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. Some traders saw it 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/Ruth Pitchford)