* FTSE 100 down 0.7 pct
* Strong year-to-date rally fans company rating downgrades
* Randgold rallies after dividend hike
By Toni Vorobyova
LONDON, Feb 4 (Reuters) - Britain's top share index edged lower on Monday as growing political uncertainty in continental Europe and a string of analyst downgrades prompted investors to take profits on a strong new year rally.
The growing popularity of former premier Silvio Berlusconi ahead of elections in Italy and a corruption scandal in Spain fanned concerns that political instability could undermine the region's slow progress out of its debt crisis.
Any setback there is also likely to hit Britain, which counts the euro zone as its top trade partner, and whose corporates have already taken hits from problems in Southern Europe.
That, together with the hefty 7 percent rally in Britain's FTSE 100 so far in 2013, prompted some investors to take profit.
"There are a lot of risks out there and, given where the market is, I don't think a lot of it is priced into the market. So I am definitely more on the cautious side," said Nick Xanders, who heads European equity strategy at BTIG.
The UK blue chip index was down 41.62 points, or 0.7 percent, at 6,305.62 points by 1208 GMT, retreating from last week's 4-1/2 year peak of 6,354.46.
Prospects of a fresh political battle over government debt levels and spending cuts in the United States, where the postponement of painful choices runs out at the end of this month, added to investor caution.
"I remain cautious because the fiscal issues in the U.S. haven't gone away ... and the European economy remains in a recession-like environment," said Gerard Lane, equity strategists at Shore Capital.
The strong recent rally in the FTSE has sparked a wave of ratings downgrades for individual companies which analysts, at least in part, attribute to now less attractive valuations.
Engineering group Meggitt fell 2 percent after analysts at UBS downgraded the stock and removed it from the 'M&A Watch List' following the 15 percent share price rally since the start of 2013.
"With the limited upside to fair value on a stand-alone basis, we believe that an acquirer would find it difficult to buy Meggitt at a sufficiently high premium to the current price to be successful in the takeover and still create value," UBS analysts wrote in the note, cutting the stock to 'neutral'.
Heavyweight Vodafone, in the top fifth of year-to-date performers in the FTSE 100 with a 12 percent share price jump, proved the biggest drag on the index on Monday after a downgrade to 'neutral' from Citi.
Vodafone fell 1.7 percent, alone taking 5.6 points off the FTSE 100 where it is the fourth biggest company, with a looming trading update on Thursday adding to investor caution.
On the flip side, Africa-focused miner Randgold Resources , which has lagged the FTSE 100 so far this year with a mere 2 percent gain, rebounded in heavy volume after posting strong profits and hiking its dividend. (Reporting By Toni Vorobyova; Editing by Ruth Pitchford)