Banks pull FTSE 100 down while Royal Mail shares hit record low (UPDATE 1)

British shares retreated on Tuesday as the positive impact of a new North American free trade pact faded globally and shares of Royal Mail hit a record low the day after the 500-year-old postal service issued a profit warning.

The top FTSE 100 index fell 0.3 per cent to 7,474.55 points, outperforming continental indices hit by concerns over Italy's 2019 budget though British bank stocks were impacted.

The exporter-heavy index did not enjoy the usual accounting boost from the pound falling to a three-week low, with investors anxious about infighting in the ruling Conservative party over Prime Minister Theresa May's Brexit plan.

The biggest weight was Royal Mail, which lost 8.4 per cent to close at 358.6p, its lowest level since listing.

"We have been bearish on the outlook for productivity improvements, but yesterday's profit warning was shocking in its scale and timing," Liberum analyst Gerald Khoo said.

Shares of the company, founded under Henry VIII, plunged 18 per cent on Monday after it warned its shareholder's annual profits would be far lower than expected, hurt by eroding logistics business margins and weaker letter volumes.

Ferguson was another big loser, tumbling 6.8 per cent after the distributor of plumbing and heating products said organic revenue growth in September fell and warned of challenging UK markets.

"The U.S. still powers ahead but results are 'only' in line and there is no buyback today - is it enough to drive further outperformance?" wrote UBS analysts.

Financials were the biggest drag on the FTSE 100, taking 17.7 points off the index and tracking a slide in bank stocks across the European region triggered by anti-euro comments from an Italian lawmaker.

The market remains sensitive to any signs of Italy's new populist government causing the next existential challenge to the eurozone as the EU grapples with fraught Brexit negotiations.

Uncertainty was still palpable in the travel sector after Ryanair's profit warning on Monday.

Easyjet was down 1.4 per cent after its prospects were cut by brokers.

Miners were the top boost to the index with Randgold Resources, Evraz, and BHP Billiton up 1.7 to 1.8 per cent as zinc hit its highest in nearly two months on falling stockpiles and rising Chinese premiums.

"Physical metal strength in China likely to spread to ex-China and LME this autumn," said Goldman Sachs analysts. 

(With inputs from agencies.)