Royal Mail, airlines and housebuilders mar start of Q4 for FTSE 100 (UPDATE 1)

Britain's top share index lagged other European markets on Monday as investors kept one eye on developments over Brexit from the ruling Conservative Party's annual conference, and another on Ryanair's 13 per cent dive after a profit warning.

Gains in sterling on finance minister Philip Hammond's speech and a report of Brexit progress reined the FTSE 100 back.

The FTSE 100, whose companies make 70 per cent of their earnings from abroad, fell 0.2 per cent while the domestically focused mid-cap index rose 0.5 per cent.

"All eyes on sterling over the next few days as the pound will remain sensitive to news from the Conservative conference," said Peel Hunt economist Ian Williams.

Hammond said the UK had the fiscal capacity to cope with leaving the European Union without any agreement but believed the mood in Brussels was to reach a divorce deal.

His comments lifted the pound and that in turn sent shares in multinationals BAT and the Shire down between 1.7 and 2.3 per cent.

A report that the government was proposing a compromise on the Irish border issue - a major sticking point in the Brexit negotiations - also boosted the pound, taking the FTSE 100 down into negative territory.

Politics aside, a big weight on the FTSE 100 was Royal Mail.

Shares in the postal service operator sank as much as 20 per cent after a trading statement warning full-year performance will be "significantly below target" due to the labour market and other cost pressures impacting margins "more than anticipated".

Oil majors Shell and BP rose 0.6 and 1 per cent respectively, the biggest supports to the FTSE, as Brent prices climbed to their highest since November 2014 ahead of U.S. sanctions against Iran.

Airlines, which have recently been hit by rising oil prices that could increase their fuel costs, were under further pressure after a profit warning from Ryanair.

Europe's largest low-cost carrier cut its forecast for full-year profit by 12 per cent and said there could be worse to come if recent coordinated strikes across Europe continue to hit traffic and bookings.

Its Dublin-listed shares fell 12.4 per cent, while London-listed rivals easyJet and British Airways owner International Airlines Group fell 6.5 and 1.9 per cent respectively.

"Whilst this announcement is not a total surprise gave the short-term headwinds Ryanair has faced over the past few months, following easyJet's cautious outlook for FY19 on Friday, it is the latest indication that the "low cost wins, legacy loses" story may be coming to an end," wrote Bernstein airlines analyst Daniel Roeska.

Housebuilders were another weak spot.

Berkeley Group, Barratt Developments, and Persimmon were among the top fallers on the FTSE, down 1 to 3 per cent after the Conservative Party set out plans to levy an extra fee on foreign buyers of homes in Britain.

United Utilities rose 2.6 per cent after a Deutsche Bank upgrade to buy.

Among the smaller companies, Avocet Mining plummeted 37.9 per cent after warning it could be broken up as the gold miner continues talks with its largest shareholder to restructure its debt.

Just Group fell 9.2 per cent after the pensions provider said its finance chief would step down at the end of October, days after proposed regulatory changes forced the company to delay dividend payments. 

(With inputs from agencies.)