UPDATE 1-UK stocks hammered as trade hopes dwindle; Royal Mail sinks

UK shares were battered on Thursday as a political standoff between the United States and China cast severe doubt over prospects of a trade deal, while mid-cap Royal Mail slumped after its turnaround plan fell behind schedule.

The main index shed 0.8% as financial stocks, oil firms and miners were knocked after U.S. legislation backing protesters in Hong Kong raised concerns on whether a deal could be reached this year. The FTSE 250 was on course for its worst day in more than six weeks as it slid 1%, weighed down by a 17% plunge in Royal Mail.

The postal company's shares, which have dropped nearly a third in value this year, we're tracking their worst day in more than a year and Jefferies analysts said productivity targets look increasingly challenging in light of tensions with its largest union. Worries over U.S.-China trade have escalated this week with President Donald Trump threatening to raise tariffs on Chinese imports if no deal is struck and the bills passed by the U.S. Senate has drawn condemnation from Beijing.

China attempted on Thursday to allay some concerns but markets were still in risk-off mode, as hopes that the countries can ink a 'phase one' trade deal fade and new U.S. tariffs are set to come into force in less than a month. "Despite the cautious optimism of China's lead negotiator Liu He it is becoming, for all investors' optimism, unlikely that any phase one-China trade deal could be signed by the end of this year," CMC Markets analyst Michael Hewson wrote.

Amid the trade kerfuffle, shares of British Gas-owner Centrica outperformed the blue-chip bourse and climbed 8% as the utility stood by its annual earnings target and raised its savings forecast. Tobacco firm BAT also stood out with a 5.2% rise after U.S. health regulators said it had removed a plan to cap nicotine levels in cigarettes to non-addictive levels.

However, chemicals group Johnson Matthey tumbled 6% to the bottom of the FTSE 100 after reporting a lower profit and forecasting annual performance to fall below last year. . A bright spot among mid-caps was Britain's biggest motor insurer Direct Line, which advanced 5% after laying out a plan to rein in expenses.

AIM-listed Dart Group, the owner of British airline and tour operator jET2, surged 8% as strong results, upbeat forecast and a dividend hike pleased investors.

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