FTSE falls to lowest level in nearly five months

By Sudip Kar-Gupta and Alistair Smout

LONDON (Reuters) - Britain's top share index fell to its lowest level in almost five months on Thursday, hit by falls in downgraded travel and leisure stocks, though Tesco rose after the supermarket chain posted strong sales figures.

The blue-chip FTSE 100 index was down 88.02 points, or 1.5 percent at 5,872.95 by 1246 GMT, having hit its lowest intraday level since late August 2015 in early trade.

The FTSE 100 is down by about 6 percent since the start of this year and down nearly 20 percent from last April's record high of 7,122.74 points.

"This market is in contraction and I expect this contraction to continue for the next six months," Beaufort Securities' sales trader Basil Petrides said.

InterTrader's chief strategist Steve Ruffley was also cautious, saying the FTSE could fall to 5,500 points this quarter.

Travel and leisure companies were the top fallers, with Merlin Entertainments, TUI and Intercontinental Hotel Group down 4-6.5 percent.

JP Morgan downgraded Merlin to "underperform" and TUI to "neutral", while cutting its target price on Intercontinental, saying that valuations were high against peers.

However, Tesco managed to climb higher despite the overall market weakness.

Tesco shares rose by about 4 percent after Britain's biggest supermarket chain posted better than expected sales over the key Christmas period.

Tesco's solid numbers followed similarly robust results from peers Sainsbury and Morrisons, as established grocers battle increased competition from discounters such as Aldi and Lidl.

"While the results are encouraging, the road ahead remains difficult," said Himanshu Pal, retail insights director for Kantar Retail. "The UK grocery environment will continue to be tough in the near future but it’s heartening to see the top-four grocers fighting back against the discounters."

Oil and gas shares recovered from early weakness to add 5 points to the index, with Brent steadying after hitting 12 year lows earlier in the session.

(Editing by Tom Heneghan)