Tesco shares fell sharply as investors began to tot up the problems facing the supermarket's new boss Dave Lewis.

Deutsche Bank cut its price target on Tesco shares and warned there was likely to be a further drag on trading in the short term as Mr Lewis opts to step up investment in the customer offer as well as store refurbishments.

The departure of chief Philip Clarke meant investors overlooked a profits warning from the chain on Monday, but with Deutsche forecasting that it will take time to complete the turnaround shares fell four per cent or 11.3p at 277.4p.

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Tesco's slump - accompanied by a fall of 2.2p to 171.5p for fellow struggling supermarket chain Morrisons - came as the FTSE 100 climbed 66.9 points to 6728.4. The pound held steady against the dollar, at 1.71, and approached its strongest level for 22 months against the euro, at 1.27, despite UK government borrowing of £11.4 billion coming in higher than forecast last month.

The wider market was lifted by hopes of an easing in tensions over the downing of a passenger jet in Ukraine after pro-Russian separatists released a train packed with bodies and handed over the aircraft's black boxes.

IG market analyst Chris Beauchamp said: "Talk of a new Cold War was always rather excessive, but fears of a renewed freezing over in east-west relations have diminished on signs of co-operation in the investigative efforts."

The recovery was driven by commodity-based stocks, while airlines also improved as easyJet lifted 52p at 1392p - almost four per cent - and British Airways owner International Airlines Group added 10.2p to 333.3p.

Chip designer ARM Holdings, which provides the technology for nearly all mobile phones and many other electronic devices, was the biggest riser as investors cheered a 20 per cent dividend hike for the first half of the year.

The FTSE 100 stock lifted almost six per cent or 47.5p to 881p, despite an initial negative reaction to its second quarter revenues figure of £187.1 million.

Royal Mail shares fell by as much as four per cent at one stage as it warned parcels revenues for the full year would be lower than expected amid increased competition in the UK.

The stock is now at its lowest level since last autumn's privatisation and ended the day three per cent, or 16p, lower at 450p.

Royal Mail said UK parcel revenues fell one per cent as it was hit by rivals "aggressively reducing prices" though a focus on costs and a better performance from letters meant full-year guidance remained unchanged.

The biggest risers on the FTSE 100 were ARM Holdings up 47.5p at 881p, Persimmon up 56p at 1302p, Barratt Developments up 14.3p at 368.5p and easyJet up 52p at 1392p.

The biggest fallers were Tesco down 11.3p at 277.4p, Royal Mail down 16p at 450p, Sainsbury's down 4.5p at 313.8p and Morrisons down 2.2p at 171.5p.