UPDATE 1-UK shares fall on worries over hard Brexit; Unilever drops

UK firms more exposed to the domestic economy took a hit on Tuesday following reports that Prime Minister Boris Johnson will pass a law that could re-ignite fears of a hard Brexit, while Unilever slipped 5% after cutting its 2019 sales growth view. Johnson is likely to block the extension of a Brexit transition deal with the European Union beyond 2020, increasing the risk of Britain leaving the bloc without a free trade agreement.

That pushed the midcap FTSE 250 down 1.4% and on course for its worst day in two-and-a-half months. The index had hit successive all-time highs in the last two sessions after Johnson's election victory. "The reality check of the possibility of a no-deal Brexit, while still over a year away, has tempered some of the enthusiasm from last Thursday's election result," CMC Markets analyst Michael Hewson said.

JPMorgan's basket of London-listed companies that make their cash in domestic markets dropped 2.7%, having soared more than 9% since Friday over the election euphoria. "The next 12 months are going to be another series of painful negotiations... it's not over yet," said OANDA analyst Craig Erlam.

Blue-chip banks Lloyds, RBS and Barclays tumbled between 4% and 5%. An index of housebuilders shed 2.3% and was on track for its worst one-day fall since early October. Still, the FTSE 100 recouped most of its earlier losses to trade about flat by 0900 GMT, supported by trade-sensitive stocks amid optimism around a proper agreement between China and the United States.

Asia-focussed HSBC and oil majors advanced, benefiting from de-escalating tensions after Washington and Beijing reached a 'phase one' deal over the weekend. Shares of Boeing suppliers as well as those of airlines skidded after the U.S. company suspended production of its 737 MAX jetliner. The most notable loser was Senior Plc , which fell 7% and was set for its worst day since June.

British Airways owner IAG dipped 2.6% and engine maker Rolls-Royce shed nearly 2%. News-driven moves saw Petrofac fall 4.4% after the oilfield services provider forecast lower annual revenue. Travel services provider Trainline, which floated earlier this year, was 2.2% lower following a trading update.