The preliminary reading of the HIS Markit/CIPS UK Composite Purchasing Managers' Index (PMI) pointed to one of the strongest monthly improvements in business activity since 1998.

The FTSE 100 index inched lower 0.2%, while the domestically focused mid-cap index shed 0.1%

Dollar-earning consumer staples stocks, including Unilever, Reckitt Benckiser Group, British American Tobacco and Diageo Plc fell between 0.4% and 1.2%, and were among the biggest drags.

"The latest flash PMI figures set the tone ahead of tomorrow's interest rate decision by the Bank of England," said Danni Hewson, analyst at AJ Bell.

"All those cost pressures will work their way through and signal an uncomfortably bumpy period where inflation will continue on its upward trajectory."

A recent rise in inflation has kept the FTSE 100 pinned near the 7,000 mark, although easing lockdown restrictions and attractive stocks valuations have revived demand for shares that stand to benefit from a steady economic recovery.

Following a hawkish tone by the U.S. Federal Reserve on monetary policy last week, investors are focused on the Bank of England's meeting on Thursday for cues on the central bank's stance on the rising prices.

"Investors might expect some guidance on the future trajectory of UK interest rates although consumer prices are merely bubbling on this side of the Atlantic when compared with the boiling point they have already reached in the U.S.," said Russ Mould, investment director at AJ Bell.

Oil majors BP and Royal Dutch Shell jumped over 1.6%, while base metal miners and travel stocks gained 0.8% and 6.1% respectively.

Homebuilders dropped 1.4%, with Persimmon among the top losers in the index.

The drop came after Persimmon and insurer Aviva agreed to measures suggested by Britain's competition regulator as part of its long-running investigation into possible mis-selling of leasehold homes and high ground rents.

(Reporting by Shashank Nayar and Amal S in Bengaluru; Editing by Subhranshu Sahu and Jonathan Oatis)

By Shashank Nayar and Amal S