By Danilo Masoni

MILAN (Reuters) - British shares stumbled on Monday as strength in the pound weighed, while gambling companies suffered double-digit falls as fears of a government clampdown weighed on that sector.

Shares in William Hill (WMH.L) and Ladbrokes (LCL.L) fell 11.6 percent and 7.9 percent respectively after reports that the government was set to lower the limit on betting shop terminals to 2 pounds from 100 pounds in a move that could hit their revenue.

Their losses weighed on the mid cap index (.FTMC), which ended flat. The blue chip FTSE 100 (.FTSE) was down 0.2 percent at 7,715.44 points at its close.

William Hill and Ladbrokes, which is being bought by GVC (GVC.L) for up to 4 billion pounds, both hit their lowest level in more than seven weeks, while Paddy Power (PPB.L) on the FTSE fell 2.1 percent. GVC fell 1.2 percent.

The Sunday Times newspaper, citing an ally of new culture secretary Matt Hancock, reported that the betting cut was being taken to help tackle the issue of problem gambling.

In spite of the heavy losses, Investec analysts affirmed their buy rating on William Hill, saying a consultation over FOBTs (fixed odds betting terminals) only closes on Tuesday and that speculation over the final outcome was premature.

Among other outstanding movers were shares in Ocado (OCDO.L), up 27.5 percent, after the online grocer signed a deal with Sobeys Inc to develop the online grocery business at Canada's second largest food retailer.

On the FTSE, NMC Health (NMC.L) rose 2.4 percent to a new record high after it announced the acquisition of majority stakes in a cosmetic surgery company and a clinics business for a combined $207 million.

In the same sector Shire (SHP.L) also rose, up 1.4 percent.

Consumer staples took the most points off the FTSE 100, nearly nine points, with overseas earners Diageo (DGE.L), British American Tobacco (BATS.L) and Unilever (ULVR.L) falling as sterling rose towards $1.40.

Relx (REL.L), down 2.6 percent, was among the biggest blue chip fallers, following a downgrade to "equal-weight" from "overweight" from Morgan Stanley.

(Reporting by Danilo Masoni and Kit Rees, editing by Pritha Sarkar)