May leads three-horse PM race as Brexit hits pound and property

By William James and Mark Trevelyan

LONDON (Reuters) - Interior minister Theresa May opened up a strong lead on Tuesday in what is now a three-horse race to become Britain's next prime minister, but the first stage of voting was overshadowed by post-Brexit carnage for property investors and the pound.

In symptoms of market concern about the economic impact of leaving the European Union, sterling hit new 31-year lows and three funds investing in British property said they were suspending trading because too many people were rushing to withdraw their money at once.

May won 165 votes in a first ballot of Conservative members of parliament and Andrea Leadsom, a junior energy minister, won 66, increasing the likelihood that Britain will get only its second woman prime minister after Margaret Thatcher. Justice Secretary Michael Gove was third on 48.

Former defence minister Liam Fox won the fewest votes, 16, and was eliminated from the battle to replace David Cameron, who has said he will step down after Britons voted in a June 23 referendum to break away from the EU.

Soon afterwards, work and pensions minister Stephen Crabb, who placed fourth with 34 votes, said he was pulling out and throwing his "wholehearted support" behind May. Fox said he would also back her.

May, 59, said: "There is a big job before us: to unite our party and the country, to negotiate the best possible deal as we leave the EU, and to make Britain work for everyone.

"I am the only candidate capable of delivering these three things as prime minister, and tonight it is clear that I am also the only one capable of drawing support from the whole of the Conservative Party."

'NO CORONATION'

The drawn-out selection process will ultimately be decided by about 150,000 Conservative Party members in September, once MPs have whittled the field down to two candidates.

Given strong eurosceptic sentiment among grassroots Conservatives, Leadsom, 53, and Gove, 48, remain in contention. Both were leading voices in the victorious Leave campaign, while May favoured remaining inside the 28-nation EU.

Leadsom backer Stewart Jackson told Sky News: "This shows she's ready to go all the way, there isn't going to be a coronation" of May.

In the meantime, signs are multiplying that concern about the impact of Brexit on trade, investment and business confidence is starting to hit the economy.

The 4.4-billion-pound ($5.7 billion) Property Portfolio run by M&G Investments, the fund arm of insurer Prudential , was the latest to suspend business on Tuesday afternoon. Insurer Aviva's fund arm had earlier stopped trading in its 1.8-billion-pound UK Property Trust, while Standard Life Investments suspended a 2.9-billion-pound fund late on Monday.

Shares plunged in other property-related funds, and asset managers and insurers were also hit.

The pound, which has borne the brunt of market concern about potential damage to the economy, plumbed new 31-year lows and is now down more than 12 percent since the referendum.

"There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging," the Bank of England said, announcing measures to encourage banks to keep lending.

In a possible blow to London's financial centre, Germany's Deutsche Boerse signalled on Tuesday that the headquarters of a European giant to be created from its merger with the London Stock Exchange Group may now have to be outside the United Kingdom.

Voters were bombarded in the run-up to the referendum with warnings from Cameron and a host of financial institutions and think tanks that Brexit would plunge Britain into a self-inflicted recession by jeopardising its access to the EU's tariff-free single market.

The Leave campaign derided such arguments as 'Project Fear', arguing Britain would prosper by regaining 'independence' from Brussels and freeing itself to set its own laws, clinch its own trade deals and set a cap on immigration - something it cannot do under EU rules allowing free movement throughout the bloc.

"BLOODY DIFFICULT WOMAN"

Whoever wins the Conservative leadership and the keys to 10 Downing Street will have to stabilise the economy and unify a party that was deeply split by the referendum campaign.

The victor will also need to decide when to initiate divorce proceedings with the EU, and how to extricate Britain from 43 years of membership while trying to negotiate favourable terms of trade.

The most seasoned candidates in the field are May and Gove, who stunned colleagues and commentators alike when he abruptly withdrew his support for former London mayor Boris Johnson last week, effectively forcing him from the race. Leadsom entered parliament only six years ago after a long career in financial services, and has never served in the cabinet.

Gove and Leadsom have both argued forcefully that the next prime minister should come from the winning side in the referendum, which would disqualify May.

"I've managed to bring people together across the Conservative Party behind a hopeful and optimistic message of change, and I hope that I'll be able to take that message to the country," Gove said.

In unguarded comments earlier on Tuesday, caught on camera and broadcast by Sky News, former Conservative minister Ken Clarke made disparaging remarks about all three contenders, saying that with Gove as prime minister "we would go to war with at least three countries at once".

He described May as "a bloody difficult woman", but no more difficult than Thatcher, in whose cabinet he served. He added that she was "good", but lacking in foreign policy experience.

Of Leadsom, Clarke said: "She does have experience in the City ... She is not one of the tiny band of lunatics who think we can have a sort of glorious economic future outside the (EU) single market. So long as she understands that she's not to deliver on some of the extremely stupid things she's been saying."

(Additional reporting by Elizabeth Piper, Kylie Maclellan, Michael Holden, Vikram Subhedar, David Milleken, Huw Jones, William Schomberg and James Davey; writing by Mark Trevelyan; Editing by Janet Lawrence)