UK midcaps hits new one-month low as business activity stalls

Aug 23 (Reuters) - The British midcap index hit a fresh one-month low on Tuesday as a looming gas crisis in Europe and news of slower-than-expected business activity growth exacerbated fears of recession, while a stronger pound weighed on the exporter-heavy FTSE 100.

The domestically oriented FTSE 250 closed down 1%, marking a third consecutive day of decline, as soaring UK gas prices fueled fears of surging inflation that has restrained the economy.

A closely watched survey showed growth in Britain's private sector slowed to a crawl in August as factory output fell and the larger services sector eked out only a modest expansion, adding to signs that recession may be looming.

"Although they're still growing, there's a fear that they could slip into contraction territory," said David Madden, market analyst at Equiti Capital in London.

"Combined with that, the Bank of England (BoE) have hiked interest rates loads of times but they're not getting inflation under control. So now they'll probably keep hiking rates and compounding the overall issue."

Investors expect another 50 basis point rate hike when the central bank meets next month.

The blue-chip FTSE 100 ended 0.6% lower, as a stronger pound weighed on stocks of pharma and consumer staple companies which make much of their revenue in dollars.

Sterling also rose against the dollar after weaker-than-expected U.S. economic data spurred hopes that the U.S. Federal Reserve would not raise rates as aggressively as perceived.

The FTSE 100 index has rallied 7% from mid-June lows, boosted in part by strong corporate earnings and its composition of global companies and firms that are defensive in nature.

"Everybody is trying to answer the question to what degree was the recent rally due to short covering in a bear market squeeze or an over optimistic expectations for central bank pivot in 2023 or lot of the bad news already priced in," said Russ Mold, AJ Bell's investment director.

Among single stocks, Wood Plc slipped 2.4% after the oilfield services and engineering firm reported a 5% fall in core earnings from continuing operations in the first half. (Reporting by Johann M Cherian, Sruthi Shankar and Aniruddha Ghosh in Bengaluru; Editing by Krishna Chandra Eluri, Dhanya Ann Thoppil and Richard Chang)