* FTSE 100 down 0.4 pct
* FTSE 250 rises 1 pct, at over 3-wk high
* Dunelm surges after strong update
* Tobacco firms among worst FTSE 100 fallers (Adds company news items, updates share moves)
By Muvija M and Shashwat Awasthi
Jan 7 (Reuters) - The FTSE 100 fell on Monday as pessimism over the global economy and Brexit concerns arrested a rally prompted by U.S.-Sino trade talks, while mid-caps advanced in part thanks to an upbeat trading update from retailer Dunelm.
The main index fell 0.4 percent while a boost from consumer stocks helped the mid-cap index notch a three-and-a-half-week high and close 1 percent higher.
Talks between the world’s two biggest economies kicked off in Beijing on Monday, with the foreign ministry in Beijing saying it had the “good faith” to work with Washington to resolve trade frictions.
Although UK stocks opened higher, the FTSE 100 - which makes about 70 percent of its income abroad - erased those early gains, with tobacco and consumer staples, including AstraZeneca , Reckitt Benckiser, Unilever, the biggest drags, weighed down by a weaker dollar.
British American Tobacco and Imperial Brands extended losses to shed 4.2 percent and 5 percent, respectively, after a Cowen downgrade in light of higher e-cigarette use among youngsters.
Miners helped cushion the market’s fall as metals prices climbed after China cut reserve requirement ratios.
Overall, investors had doubts that the trade talks would deliver a long-term solution, and some of Monday’s falls were likely driven by traders taking profits after Friday’s rally.
“Given the lowish status of the actual trade talk participants ...I think markets are taking a more wait-and-see approach on this issue - which is by far the most important influence on global market direction in 2019,” said Chris Bailey, a Raymond James analyst.
“Of course, the UK specifically has the Brexit curveball to deal with too.”
The European Commission reiterated that British Prime Minister Theresa’s May’s divorce deal would not be renegotiated, as a poll showed a record low of British voters think she has got the right agreement.
May said on Sunday that Britain would be in uncharted territory if her deal is rejected by parliament this month, despite little sign that she has won over sceptical lawmakers.
Stocks had rallied to record their best weekly gain in two months on Friday as strong U.S. jobs data and accommodative comments from Fed chair Jerome Powell boosted the market.
A top mover on Monday was mid-cap homeware retailer Dunelm which surged 15 percent, its biggest one-day gain in nearly a decade, after it guided to a jump in first-half earnings.
Consumer stocks were the biggest support to the index as a result.
“This performance by an established market leader is doubly impressive considering the unhelpfully mild autumn weather and generally uncertain UK consumer environment,” wrote Stifel analysts.
Madame Tussauds-owner Merlin Entertainments was 5.2 percent higher after a partnership agreement to build a Legoland theme park in South Korea.
Sainsbury’s, Tesco and Morrisons rose 1.8-2.6 percent after German discount supermarket Aldi’s British unit reported higher sales for the Christmas week.
UK retailers will be in focus this week with other supermarkets and high street chains also due to issue Christmas trading updates, as investors seek confirmation of how the battered sector fared over the holiday.
Broker notes drove other moves.
British Gas owner Centrica tumbled 4.4 percent on the main index after Jefferies downgraded the stock, and HSBC dipped 2.2 percent after Citigroup cut its rating on the stock to sell. (Reporting by Muvija M and Shashwat Awasthi in Bengaluru; editing by Josephine Mason and John Stonestreet)