Updated at 1630 GMT

By Shubham Batra and Sruthi Shankar

Oct 31 (Reuters) -The UK's main stock indexes fell to a near three-month low on Thursday as investors scaled back bets of rate cuts from the Bank of England (BoE) following Britain's new big-spending budget plans which has revived worries about inflation.

The blue-chip FTSE 100 .FTSE dropped 0.6%, while the domestically focused FTSE 250 .FTMC fell 1.5%. Both the indexes touched their weakest level since August 8 and looked set for monthly losses.

Rate-sensitive homebuilder stocks .FTNMX402020 tumbled about 6% as British short-term borrowing costs jumped. GB/

New finance minister Rachel Reeves announced the biggest tax increases in three decades in her first budget on Wednesday, saying she needed to spend heavily to repair the country's public services.

Britain's independent budget forecaster said her plans would boost the size of the world's sixth-largest economy in the short run but raise inflation too, prompting investors to rein in bets that the BoE will reduce rates rapidly over the next year.

Traders still stuck to bets that the central bank will cut rates on Nov. 7 by a quarter of a percentage point.

"Based on what's happened to the two-year gilt, we might start to see mortgages creeping up again, just when borrowers thought we were on a firmly downward path," said Laith Khalaf, head of investment analysis at AJ Bell.

British medical equipment maker Smith + Nephew SN.L tumbled 12.5%, falling the most among FTSE 100 components, after it cut its annual underlying revenue growth forecast.

DS Smith SMDS.L climbed 14.3% as U.S. packaging company International Paper IP.N, which is buying the British firm, reported better-than-expected quarterly earnings.

Shell SHEL.L jumped 3.5% after its third-quarter profit of $6 billion exceeded forecasts as weaker oil refining and trading results were offset by higher LNG sales.

Reporting by Shubham Batra and Sruthi Shankar in Bengaluru; Editing by Savio D'Souza and Jane Merriman

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