FTSE dips early as weak banks offset drug gains

* FTSE down 0.2 percent in early trade

* Banks decline as uncertainty on U.S. bailout continues

* Defensive pharmaceuticals gain ground

By Simon Falush

LONDON, Sept 25 (Reuters) - The UK's leading share index edged lower in early trade on Thursday as losses in the troubled banking sector offset gains in defensive pharmaceuticals companies.

By 0802 GMT the FTSE 100 was down 0.2 percent or 7.9 points at 5,088.9 points after losing 0.8 percent on Wednesday.

The index has fallen 9.5 percent so far in September and is on track for its biggest monthly decline in six years as fears about the health of the global financial system intensify.

Banking stocks fell as continuing uncertainty about when Congress might approve a $700 billion financial sector bailout weighed on the embattled sector.

In an attempt to convince Americans to support the Wall Street rescue package, President George W. Bush warned on Wednesday that the United States was in the middle of a serious financial crisis that could push the economy into recession. [ID:nN24444366]

"The only show in town is the U.S. bailout, and it's see-sawing as to whether it will get through," said Richard Hunter, head of UK equities at Hargreaves Lansdown. "The longer it goes on the more uncertainty there will be... and if there's one thing the market hates it's uncertainty."

Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) fell 2.4 percent after Deutsche Bank downgraded it to "sell" from "hold" and cut its price target to 200 pence from 250 pence.

Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) and HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) fell between 0.5 and 2.4 percent.

Gloom on the banking sector is spreading to the wider economy, with the credit crunch seen as forcing consumers to draw in their horns.

Iconic high street retailer Marks & Spencer (MKS.L: Quote, Profile, Research, Stock Buzz) fell 2.4 percent, while Next (NXT.L: Quote, Profile, Research, Stock Buzz) lost 0.9 percent.

Supermarkets were also on the back foot with Tesco (TSCO.L: Quote, Profile, Research, Stock Buzz) down 0.9 percent and Morrison MMRW.L losing 0.2 percent and Sainsbury (SBRY.L: Quote, Profile, Research, Stock Buzz) down 0.6 percent.

Leading supermarkets and consumer goods businesses are facing the threat of heavy fines after the Office of Fair Trading confirmed it had found evidence of companies sharing price plans, the Financial Times said.

Energy stocks fell even as oil CLc1 rose above $106 per barrel. Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) British Gas (BG.L: Quote, Profile, Research, Stock Buzz) fell 0.8 percent while BP (BP.L: Quote, Profile, Research, Stock Buzz) lost 0.6 percent.

The Times reported that Robert Dudley, current chief executive of TNK-BP may quit the British oil group's board as the hunt for a new boss for the Russian joint venture hots up.

OIL PRICE WEIGHS

The higher oil prices pressured British Airways (BAY.L: Quote, Profile, Research, Stock Buzz) which fell 1.1 percent.

Thomas Cook (TCG.L: Quote, Profile, Research, Stock Buzz) slid 7.9 percent after German stores and tourism holding company Arcandor (AROG.DE: Quote, Profile, Research, Stock Buzz) said it may lower its stake in the company.

Pharmaceuticals, seen as defensive stocks and attractive at times of market uncertainty, were the FTSE 100's biggest weighted gainers with AstraZeneca (AZN.L: Quote, Profile, Research, Stock Buzz) up 1 percent and GlaxoSmithKline (GSK.L: Quote, Profile, Research, Stock Buzz) up 0.8 percent.

In the FTSE 250 the Daily Mail & General Trust (DMGOa.L: Quote, Profile, Research, Stock Buzz) fell 8.4 percent after it said it sees full-year adjusted results at the low end of market expectations as a deteriorating UK economy hits its ad sales and property information business. [ID:nWLA0174]

The world's largest hotelier Intercontinental Hotels (IHG.L: Quote, Profile, Research, Stock Buzz) gained 0.5 percent after chief executive Andrew Cosslett told Reuters in an interview it has not yet seen an impact on its development pipeline from the credit crisis. [ID:nN24471383] (Editing by Hans Peters)