By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Stocks in London stayed mostly lower on Monday, after U.K. manufacturing data missed expectations and fell to a three-month low.

The FTSE 100 index dropped 0.2% to 6,495.29, setting it on track for the lowest closing level since Dec. 17.

The benchmark stayed lower after the CIPS/Markit purchasing managers' index for the U.K. manufacturing sector fell to 56.7 in January from 57.2 in December, falling short of analysts' expectations. A reading above 50 signals expansion, with the data suggesting continued improvement in the U.K. economy.

"With jobs growth strong, we do not expect any slowdown in domestic-demand growth in 2014. Indeed, the risks are that it accelerates further, with investment likely to pick up and consumer confidence improving. We also do not expect serious fallout for the U.K. from the emerging-market wobbles," said Rob Wood, chief U.K. economist at Berenberg, in a note.

PMI data from China were also in the spotlight, after official readings released at the weekend showed a slowdown in growth in both the services and manufacturing sectors.

Among notable movers in London, shares of Lloyds Banking Group PLC (LYG) dropped 2.3% after the bank said it would set aside an extra 1.8 billion pounds ($3 billion) to repay customers who were mis-sold payment-protection insurance (PPI). Despite the extra provision, the bank said underlying earnings for the full-year would come in ahead of expectations and that it would reinstate dividends.

"Lloyds says it is still on track to post a small profit, but the PPI costs will certainly hit earnings for the bank at a time when the government and the bank are looking to get the taxpayers' stake sold-off back into the markets," Ishaq Siddiqi, market strategist at ETX Capital.

"Lloyds is seen as the better-behaved U.K. bank versus scandalous peers RBS and Barclays. However, like them, it cannot run away from the banking sector's errors of the past," he added.

Royal Bank of Scotland Group PLC (RBS), down 0.3%, warned last week of a GBP3 billon surprise provision, including GBP465 million to pay for PPI claims.

On a more upbeat note, Smith & Nephew PLC climbed 1.5% after the medical technology group said it will buy medical-device maker Arthrocare Corp.(ARTC) for $1.7 billion in cash.

Randgold Resources Ltd. gained 1.9% after the gold miner said it boosted gold production to a record level in 2013.

In Ireland, shares of Ryanair Holdings PLC gained 5.4% after the budget airliner confirmed its full-year guidance, even as it swung to a loss in its fiscal third quarter.

More must-reads from MarketWatch:

'Stormy' January jobs report tough to figure

European stocks slip after China PMI data

France's Orange says customer info hacked: report

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