UK stocks rise as easing oil prices lift sentiment; Fed decision awaited?

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* FTSE 100 up 0.3%, FTSE 250 gains 1%

* Oil slide helps risk appetite even as Middle East tensions persist

* British borrowing costs fall for third consecutive day

* Diploma hits record high after raising fiscal guidance

By Tharuniyaa Lakshmi

March 18 (Reuters) - London shares extended gains on Wednesday, as oil prices retreated and offered some relief to rattled global markets, while investors awaited the U.S. Federal Reserve rate decision later in the day. The Middle East war, in its third week, showed no signs of easing as Israel and Iran intensified attacks following the killing of Tehran's security chief. Oil, however, fell after Iraq resumed exports through the Ceyhan pipeline.

UK's blue-chip FTSE 100 was up 0.3% by 1044 GMT, rising for the third consecutive day, while the mid-cap FTSE 250 rose 1%.

Aerospace and defence jumped 2% and financials added 1.9%, leading the day's gains. The energy sector fell 0.6% from Tuesday's record high. Ithaca Energy (ITHLF) dropped 5.2% after the oil and gas producer swung to an annual net loss.

Meanwhile, markets expect the Fed to keep rates unchanged. Investors will closely parse the Fed's outlook for any signals on future monetary policy direction. At home, British government borrowing costs fell to their lowest in a week, though they remain higher than before the conflict amid worries about inflation and uncertainty over further Bank of England rate cuts. Most economists polled by Reuters abandoned their calls for a March 19 BoE rate cut and now expect a 25-basis-point trim in April or June.

"Despite energy market developments, we see one 25-bp cut to the BoE's policy rate on the cards late this year. Moreover, we see fears of a rate hike by the BoE as overdone, given the tendency for central banks to 'look-through' energy shocks," said Grant Slade, economist at Morningstar.

"We expect the BoE to hold Bank Rate steady at 3.75% at tomorrow's MPC meeting." Among individual stocks, Diploma jumped 18.2% to a record high after the technical products and services distributor raised fiscal year 2026 guidance. IT firm Softcat rose 8.9% after raising its annual profit forecast. (Reporting by Tharuniyaa Lakshmi in Bengaluru; Editing by Harikrishnan Nair)