By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- U.K. stocks continued to fall on Monday, with the investing mood hurt by escalating tensions in Iraq, as well as by a solid advance in the pound on the back of hints last week by Bank of England Governor Mark Carney that interest rates could rise sooner than expected.

The FTSE 100 index fell 0.1% to 6,768.57, after closing down 1% on Friday.

The weakness in U.K. stocks was partly due to comments from BOE chief Mark Carney who said late Thursday last week that the first hike in interest rates could come sooner than markets currently expect. Several economists now expect the key lending rate to rise from the current record low of 0.5% by the end of this year rather than in 2015.

The pound (GBPUSD) rallied after the news and continued its ascent on Monday, when the U.K. currency breached the $1.70 level for the first time since 2009.

Another focal point for investors was the rising tensions in Iraq. A radical Sunni militia last week seized control of several towns in the north and east of the country, gradually moving closer to the capital Baghdad. Over the weekend, the insurgents bragged about the execution of hundreds of Shiite Iraqi soldiers on Twitter, posting photos to support their accounts.

Oil prices have soared in the wake of the conflict and have further added to concerns about the impact of higher energy prices on the broader global economy. On Monday, crude-oil prices (CLN4) rose to $107.17 a barrel, marking the highest level since September last year.

U.K. oil companies largely bucked the overall negative trading trend in the stock market. Shares of Tullow Oil PLC gained 1.1%, BP PLC (BP) climbed 0.5%, and Royal Dutch Shell PLC (RDSB) added 0.3%.

Among declining stocks, shares of Smith & Nephew PLC lost 2.5% after Medtronic Inc. (MDT) -- who was said to have been considering a takeover of the U.K. medical-device maker -- on Sunday said it plans to buy Ireland-based Covidien PLC (COV) in an almost-$43-billion deal.

Shares of Vodafone Group PLC (VOD) fell 0.4% after the wireless-telecoms giant said it plans to acquire Cobra Automotive Technologies SpA for 145 million euros ($197.5 million) to expand its machine-to-machine capability.

More must-reads from MarketWatch:

Fed faces economy with conflicting vital signs

Why stock buybacks are losing their fizz

4 stocks that have tripled -- and are set for more gains

Subscribe to WSJ: http://online.wsj.com?mod=djnwires