Sainsbury's, Barratt drag FTSE 100 lower

(For a Reuters live blog on U.S., UK and European stock markets, click or type LIVE/ in a news window) * Sainsbury's falls after strategy update * Barratt to buy rival Redrow in 2.52 bln pound deal * PZ Cussons sees lower annual profit * FTSE 100 down 0.7%, FTSE 250 off 0.4% (Updated at 1654 GMT) By Sruthi Shankar Feb 7 (Reuters) - Britain's blue-chip stock index fell on Wednesday amid investor worries about supermarket group Sainsbury's big spending plans, while homebuilder Barratt slid after it agreed to buy smaller rival Redrow.

Britain's blue-chip stock index fell on Wednesday amid investor worries about supermarket group Sainsbury's big spending plans, while homebuilder Barratt slid after it agreed to buy smaller rival Redrow. In contrast to Wall Street, where a string of positive earnings lifted the S&P 500 to a record high, European stock markets mostly closed lower.

Sainsbury's slipped 6.1% after the group set a new cost savings target of 1 billion pounds ($1.3 billion) over three years and promised to boost returns for shareholders.

Shares of Tesco dropped 3.4% and M&S dipped 1.6% after the news. "Its growth plan is not something that is guaranteed to work its magic. Achieving the goal is another matter and it will cost money - something the market typically hates," said Russ Mould, investment director at AJ Bell.

Shares in Barratt Developments dropped 5.5% after it agreed to buy Redrow in an all-stock deal, valuing it at about 2.52 billion pounds ($3.18 billion). Redrow shares surged 14.8% to post their biggest percentage gain in more than three years. "The fact Redrow founder Steve Morgan is on board with the deal is significant although whether an increasingly interventionist Competition and Markets Authority will want to look at the deal, given Barratt is already among the country's highest volume housebuilders, is open to question," added AJ Bell's Mould.

Other homebuilders such as Crest Nicholson and Bellway rose 4.4% and 2.8%, respectively. The blue-chip FTSE 100 fell 0.7%, while the mid-cap FTSE 250 index slipped 0.4%.

Data from mortgage lender Halifax showed British house prices reporting the strongest annual growth rate for a year in January, adding to tentative signs of momentum in the housing market. Among other companies that reported, PZ Cussons tumbled 16.4% after the soap-maker forecast lower annual profit and slashed its interim dividend.

Smurfit Kappa rose 3.6% after the paper packaging producer reported a rise in fourth quarter production volume that snapped three quarters of declines.