The FTSE 100 ended down 0.2 percent but outperformed heavy losses among European stocks thanks to a weaker pound, which benefits major exporting companies.

Sterling dropped as investors adjusted interest rate expectations after inflation unexpectedly eased in June for the first time since October, surprising the market and adding to the likelihood the Bank of England will keep interest rates on hold in August.

"The Bank of England's rhetoric has taken an increasingly hawkish tone in recent weeks," Hargreaves Lansdown senior economist Ben Brettell said.

"However if today's pullback in inflation marks the start of a sustained decline, the pressure on the Bank to raise rates will ease."

Mid-cap IG Group soared more than 16 percent and was the top European gainer after the online spreadbetting company reported a growing client base and rising profit despite quiet markets.

"We regard these as very solid results in a year where market volatility has been at a multi-year low," Shore Capital analysts said.

Greater market volatility tends to bolster trading companies' profits as investors turn investment portfolios around more frequently.

Britain's second-largest listed property developer British Land was a top blue-chip performer after it announced a 300 million pound share buyback plan, providing more evidence of a pick-up in share buybacks among European corporates. Morgan Stanley analysts last week predicted this trend would accelerate.

"Given the significant discount to net asset value (NAV) at which the shares are trading, this would be NAV accretive with the scale of enhancement subject to the amount of share bought and at what price," analysts at Stifel said.

A flurry of mail activity around the British election helped Royal Mail to perform more strongly in its first quarter, sending its shares up 3.1 percent to join the FTSE 100 index's top gainers.

On the downside, Barclays led banks lower after Goldman Sachs reported a 40 percent fall in fixed-income trading, weighing on sentiment about the British bank, a major player in the bond market.

Data services firm Experian, down 2 percent, was the biggest faller among the FTSE's blue-chips after its first-quarter update.

"Revenue growth in line with expectations, but no indication yet of recovery in Consumer Services revenue in the U.S., and as expected under pressure in the UK," Stifel analysts said in a note.

Mid-caps held on to solid gains, up 0.5 percent thanks to strong progress by IG Group and Carillion.

Crisis-hit British construction company Carillion jumped 5.5 percent after its joint venture won two further contracts, worth 158 million pounds, to supply services for British military sites.

The stock is up 50 percent from last week's lows.

Defence contractor G4S rose to the top of the FTSE 100 as investors read across from Carillion's gains.

(Reporting by Helen Reid; Editing by Keith Weir and Jane Merriman)

By Helen Reid