The FTSE 100 <.FTSE> sank 0.9 percent to its worst loss in a month as the pound rose to a two-month high after EU diplomats said Britain has moved close to EU demands over Brexit.

European stocks rose 0.3 percent, having earlier hit their highest in almost three weeks.

A firming pound is viewed as negative for the dollar-earning companies that make up the bulk of the FTSE index, while an opposite swing in the currency gives them a corresponding accounting-related boost.

Internationally-focused dollar earners in the consumer staples sector dominated FTSE losses. Heavyweight tobacco firm British American Tobacco (>> British American Tobacco) shed 3.4 percent, while peer Imperial Brands (>> Imperial Brands) fell 2.9 percent.

Consumer giants Unilever (>> Unilever) and Diageo (>> Diageo) fell 2.6 and 2.1 percent, also dented by the currency gain.

Financials were a bright spot, with Barclays (>> Barclays), Lloyds (>> Lloyds Banking Group) and RBS (>> Royal Bank of Scotland Group) rising between 3.5 to 3.8 percent.

The domestically-focused lenders are beneficiaries of a stronger pound. Analysts at Brown Brothers Harriman also said the currency gain caused investors to price in more Bank of England rate rises, another positive for lenders.

RETAILERS ALSO GAIN

Retailers, for whom a falling currency translates into price inflation and margin pressure, also performed well. Supermarket Sainsbury's (>> J Sainsbury) and high street stalwarts Marks & Spencer (>> Marks & Spencer Group) and Next (>> Next) rose 2.7 to 4.4 percent.

Mid-cap Ocado (>> Ocado Group PLC) once again stole the limelight. The UK online grocer jumped 16.2 percent in the second day of a rally which has boosted its market value by 40 percent after a deal with French supermarket Casino (>> Casino Guichard-Perrachon).

The strong move higher was largely caused by a short squeeze on the stock which is heavily shorted, while the deal itself got a mixed reception from analysts.

It "appears good for sentiment but will likely have minimal profit impact for some time whilst consuming capex and cash," wrote HSBC analysts in a note.

Cinema chain Cineworld Group (>> Cineworld Group plc) posted the most spectacular fall, dropping 14 percent after it announced it was in talks to acquire U.S. peer Regal Entertainment (>> Regal Entertainment Group) for approximately $3.6 billion in cash.

The sharp dive in the shares is understandable given the size of the deal and a likely rights issueStifel analyst Jeffrey Harwood wrote

Among energy stocks, Africa-focused Tullow Oil (>> Tullow Oil) gained 3.7 percent after it refinanced $2.5 billion of loans borrowed against its oil and gas reserves.

The rest of the sector was deep in negative territory as oil prices fell on doubts about whether OPEC and Russia would agree on extending a crude production cut to cover all of 2018, and a report of an unexpected rise in U.S. crude oil inventories.

Royal Dutch Shell and BP (>> BP) both lost about 1.5 percent.

Mid-cap ZPG (>> ZPG PLC), owner of property websites Zoopla and PrimeLocation, lost 6.8 percent after it reported a smaller-than-expected full-year pretax profit as it spent more on acquisitions and advertising.

British soft drinks firm Britvic (>> Britvic Plc) shot up 6.9 percent after its full-year adjusted core earnings rose 5 percent.

Just Eat (>> Just Eat), Halma (>> Halma) and DS Smith (>> DS Smith) will join the FTSE 100 next month, index provider FTSE Russell confirmed on Wednesday.

(Reporting by Julien Ponthus and Helen Reid; Editing by Gareth Jones)

By Julien Ponthus and Helen Reid