LONDON MARKETS: U.K. Index Drops Following Bernanke Comments

By Preeti Upadhyaya, MarketWatch

LONDON (MarketWatch) -- British stocks closed lower Tuesday following a statement by Federal Reserve Chairman Ben Bernanke signaling a weak economic outlook, and as security firm G4S PLC got hit with a downgrade following its Olympics-contract debacle.

The FTSE 100 fell 0.6% to 5,629.09.

Bernanke's testimony in Washington was eagerly anticipated, but investors who were waiting for an announcement about a possible third round of quantitative easing by the U.S. central bank to aid the largest global economy were disappointed.

Bernanke instead emphasized the need to immediately address the government's massive deficit, saying it posed a threat to the economic recovery.

London investors also digested data on U.K. consumer prices, which fell 0.4 percentage points at 2.4% in June from May.

"U.K. inflation dropped sharply in June to its lowest since November 2009, further alleviating the squeeze on incomes and helping to revive consumer spending," wrote Chris Williamson, chief economist for Markit, in a note.

"However, the same factors that helped push inflation down may soon reverse and drive inflation higher again in coming months," he said, citing prospects for rising food and oil prices.

Among individual movers, shares of G4S extended losses from Monday, falling 5.7% as they were downgraded to neutral from buy at Bank of America Merrill Lynch.

The firm recently announced it expected losses of as much as $78 million on its Olympics contract after coming up short in terms of security staff. The London Games begin on July 27.