UK stocks fall as gilt yields surge on reports of Reeves' tax plan reversal

(Reuters) -London stocks tumbled on Friday, heading toward weekly losses, as gilt yields surged following reports that the UK government had abandoned plans for income tax hikes in the upcoming budget.

The blue-chip index FTSE 100 fell 1.9% as of 12:13 GMT, on pace to log its steepest one-day decline since April 9, when global markets reeled from U.S. President Donald Trump's tariff announcements.

The domestically focused FTSE 250 dropped 1.7%, heading for its worst single-day performance since late September. 

According to reports, British Finance Minister Rachel Reeves has abandoned plans to raise income tax in this month's budget, a decision that has severely undermined investor confidence in the government's ability to meet fiscal targets. This uncertainty propelled gilt yields higher. 

The market turmoil extended across asset classes, with the sterling weakening by nearly a quarter of a percent while stocks experienced a sharp, widespread decline.

Heavyweight banking stocks led the losses with a 3.3% drop.

Precious metal miners tumbled 4.4% as gold prices fell. [GOL/]

Market sentiment globally turned negative after hawkish comments from U.S. Federal Reserve officials on Thursday clouded prospects for a December rate cut, while uncertainity around U.S. economic data and concerns about an AI bubble added to investor anxiety.

In the UK, the aerospace and defence sector fell 2.6% with engineering firm Rolls-Royce declining over 2% for the second straight session. Melrose Industries edged 2.6% lower, after the GKN Aerospace owner maintained its full-year guidance.

The investment banks & brokerages sector dropped 2.6% and was set for an 11% fall this week, the most among all sectors.

Commercial property firm Land Securities reported a drop in property valuations in the first half of its fiscal year, sending its shares down 5.4%.

In a rare bright spot, shares of hospitality company PPHE Hotel Group surged 13.5% following news that key investors were considering a stake sale.

The energy sector experienced the smallest losses as oil climbed after a Ukrainian attack halted exports at a Russian port. [O/R]

(Reporting by Utkarsh Tushar Hathi; Editing by Shailesh Kuber)