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* Vodafone takes most points off FTSE after Citi downgrade
* FTSE 100 retreats from best peaks since May 2008
* Traders divided over whether or not to "buy on dip"
By Sudip Kar-Gupta
LONDON, Feb 4 (Reuters) - Britain's benchmark share index edged lower on Monday, with a fall in heavyweight telecoms group Vodafone pushing it back from a rally that had taken the market to its highest level in more than four years.
The blue-chip FTSE 100 was down by 0.3 percent, or 16.81 points lower, at 6,330.43 points in early morning trade.
The FTSE 100 has risen around 7 percent since the start of 2013, boosted by prospects of an improving global economic backdrop.
The index is also near its best level since May 2008, but some traders said they were now looking to lock in profits on equities, on expectations the rally may falter towards the end of this quarter before picking up later in the year.
"The market seems overextended at these levels. I'd prefer to take profits on the rally than buy on the dip," said EGR Broking managing director Steven Mayne.
Central Markets chief strategist Richard Perry said he would look to buy equities "on the dip" on days when the market fell, but only in small amounts.
"We're buying the corrections in small sizes but I wouldn't recommend chasing the market higher at these level in big sizes," he said.
Vodafone declined by 1.7 percent to take the most points off the FTSE 100 after Citi downgraded its recommendation on the stock to "neutral" from "buy".
Citi wrote in a research note that there was a risk that Vodafone may look to buy up businesses to address some shortcomings in its business offering, and added the company faced pressure on its revenues in Europe.
The FTSE 100 is currently in "overbought" levels, according to technical analysts, which has led some traders to sell the index on expectations that its rally may falter in the near term.
The FTSE 100 has a relative strength index (RSI) reading of 73 points - above the 70 point mark which indicates that an index is in technically "overbought" territory. (Reporting by Sudip Kar-Gupta/editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)