By Sara Sjolin, MarketWatch

LONDON (MarketWatch) — The U.K.’s FTSE 100 index posted its worst monthly performance since June on Friday, tracking a wider selloff in Europe, where lower-than-expected euro-zone inflation data spurred fears of deflation.

The FTSE 100 index /quotes/zigman/3173262/realtime UK:UKX -0.43%  dropped 0.4% to 6,510.44, closing with a 2.3% weekly decline and a 3.5% monthly loss.

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Among losers, shares of Diageo PLC /quotes/zigman/208874/realtime UK:DGE -1.07%   /quotes/zigman/19433/delayed/quotes/nls/deo DEO -0.36%  lost 1.1% after Goldman Sachs removed the drinks maker from its pan-European conviction buy list and cut its rating to neutral. The move comes after the owner of brands such as Guinness beer and Smirnoff vodka on Thursday flagged volatile demand in emerging markets, with sales in the Asia-Pacific region dropping 10%.

“We expect the softer performance in [the first half the year] to continue into 2H and see potential for continued EM challenges in [full-year 2015],” the Goldman Sachs analysts said in a note.

“Furthermore, there are no meaningful signs of a [developed markets] recovery for Diageo, and with competitive intensity picking up in U.S. vodka, we see a risk that DM growth deteriorates from here,” they added.

BAE Systems PLC /quotes/zigman/213625/realtime UK:BA -1.58%   /quotes/zigman/259559/delayed/quotes/nls/baesy BAESY -0.94%  skidded 1.6% after Barclays downgraded the aerospace and defense firm to underweight from equal weight.

More broadly in London, the benchmark index extended losses after data showed euro-zone inflation fell to 0.7% in January from 0.8% in December, missing economists’ expectations. The data reignited fears the region is heading for a period of falling consumer prices, known as deflation, which could derail the economic recovery.

As a sector, banks added the most pressure. Shares of Barclays PLC /quotes/zigman/301787/realtime UK:BARC -0.93%   /quotes/zigman/152323/delayed/quotes/nls/bcs BCS -2.08%  lost 0.9%, Royal Bank of Scotland Group PLC /quotes/zigman/10330253/realtime UK:RBS -2.13%   /quotes/zigman/530544/delayed/quotes/nls/rbs RBS -3.47%  dropped 2.1% and heavyweight HSBC Holdings PLC /quotes/zigman/13843/realtime UK:HSBA -0.51%   /quotes/zigman/207333/delayed/quotes/nls/hsbc HSBC -1.49%   /quotes/zigman/13834/realtime HK:5 -1.22%  gave up 0.5%.

On a more upbeat note in London, shares of BT Group PLC /quotes/zigman/290858/realtime UK:BT.A +3.34%   /quotes/zigman/293804/delayed/quotes/nls/bt BT +2.59% added 3.3%, after the telecoms company raised its full-year outlook, as it reported better-than-expected revenue for the third quarter.

Burberry Group PLC /quotes/zigman/307688/realtime UK:BRBY +2.62%   /quotes/zigman/566822/delayed/quotes/nls/burby BURBY +0.40%  gained 2.6%, rising with the broader European luxury-goods sector after an upbeat earnings report from peer firm LVMH Moët Hennessy Louis Vuitton SA /quotes/zigman/165816/realtime FR:MC +7.88%   /quotes/zigman/165812/delayed/quotes/nls/lvmhf LVMHF +2.16% . LVMH shares closed 7.9% higher.

Tobacco firms were also on the rise after upbeat comments from Goldman Sachs. The analysts said both British American Tobacco PLC /quotes/zigman/218491/realtime UK:BATS +0.92%   /quotes/zigman/233120/delayed/quotes/nls/bti BTI -0.44% , up 0.9%, and Imperial Tobacco Group PLC /quotes/zigman/167179/realtime UK:IMT +1.88% /quotes/zigman/168318/delayed/quotes/nls/ityby ITYBY +1.58% , rising 1.9%, currently trade on significant price-earnings discounts. The bank upgraded Imperial Tobacco to buy from neutral and added it to the conviction buy list, while reiterating a buy rating on BAT.

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