UK stocks dip as Middle East tensions drive oil higher; Fed decision looms

* FTSE 100 down 0.9%, FTSE 250 fall 0.5%

* Unilever (UL) considers separation of its food assets, Bloomberg News reports

* Diploma hits record high after raising fiscal guidance (Updates to market close)

By Tharuniyaa Lakshmi

March 18 (Reuters) - The UK's main equityindexes fell on Wednesday, erasing earlier gains, as oil prices reversed course and headed sharply higher amid escalating tensions in the Middle East, while investors awaited U.S. Federal Reserve rate decision later in the day.

The blue-chip FTSE 100 closed 0.9% down on the day after starting the week on higher note, while the mid-cap FTSE 250 fell 0.5%.

The Middle East conflict, now in its third week with no sign of easing, as a strike hit Iran's South Pars gas field - the first reported attack on its Gulf energy infrastructure. The escalation prompted Tehran to threaten retaliation, sending oil prices surging 5%.

Consumer staples weighed most heavily on the FTSE 100, dragged down by Unilever (UL), which slipped 3.4% after Bloomberg reported the consumer goods giant was weighing a separation of its food assets.

Across the Atlantic, U.S. producer prices rose by the most in seven months in February, further stoking inflation fears amid climbing shipping and energy costs.

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, market participants will also watch the Bank of England's rate decision on Thursday, with most economists polled by Reuters having abandoned their calls for a rate cut.

"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 17.8% to a record high after the technical products and services distributor raised fiscal year 2026 guidance.

Ithaca Energy (ITHLF) fell 6.6% after the oil and gas producer swung to an annual net loss. (Reporting by Tharuniyaa Lakshmi in Bengaluru; Editing by Harikrishnan Nair and Leroy Leo)