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Banks lead FTSE lower after UBS highlights capital concerns

* FTSE down 0.2 percent

* Banks lower as UBS cuts ratings

* Spanish bailout conundrum continues

* Babcock climbs after strong first-half

* Tesco, Sainsbury up ahead of results

By David Brett

LONDON, Oct 2 (Reuters) - Britain's top share index continued its choppy trend and was pulled marginally lower on Tuesday, as weakness in banks and miners overpowered results-related gains for companies such as Babcock and Tesco.

The UK's FTSE 100

closed down 11.00 points, or 0.2 percent, at 5,809.45. The index has swung in a 100-point range over the last 5 days and has registered gains of just 0.8 percent over the last month.

After rising just over 11 percent since early June - fuelled by central banks acting to stimulate the global economy - investors have started to take risk off the table.

High beta plays - stocks best to own in a strong bull market and worst to own in a bear market - like miners

and banks fell 0.8 percent and 1.4 percent respectively.

Banking shares dominated the fallers after UBS cut their rating to "neutral" from "buy", citing concerns the sector may need to raise new capital at some point.

Part-nationalised lenders Royal Bank of Scotland

and Lloyds

fell 3.3 percent and 2.5 percent respectively.

Credit Suisse said it has kept a small "underweight" position in lenders in Europe, saying banks should be around 30 percent cheaper (price-to-book of 0.7 times) to compensate for the high risks (taxation, disintermediation, further regulation and change to bankruptcy laws).

Investor sentiment towards risk assets continues to waver with worries lingering over whether Spain will request a bailout from Europe and if global economic growth can be sustained.

European officials said Spain is ready to request a euro zone bailout for its public finances as early as next weekend but Germany has signalled that it should hold off.

"Even though the Spanish prime minister remains reluctant to go cap in hand to the EU for fear that they will attach such stringent conditions to any bailout, sending the country down the same path as Greece, the markets are readying themselves for such an outcome," Angus Campbell, head of market analysis at Capital Spreads, said.

After the FTSE 100 rerated to a forward price-to-earnings ratio of 11.3 times - below historic levels but near post-credit crisis highs - investors are now awaiting signs that the central bank stimulus over the summer will lead to sustainable growth.

EARNINGS EYED

"What is more important now is the growth outlook. You could argue at the start of the year that on valuation grounds equities were cheap, but now they have rerated ... and with earnings yet to pick up, that argument is now looking stretched," Ian Williams, equity strategist at Peel Hunt, said.

British defence services group Babcock International

rose 2.4 percent after the firm delivered a strong first-half performance.

Tesco and Sainsbury , both due updates on Wednesday, climbed 1.7 percent and 0.3 percent respectively.

Heavyweight integrated oil stocks rose as a sector, led by BG Group

, up 1.6 percent after Citigroup said the oil firm offered the best value growth in European oils.

Citi was bullish on Tullow Oil

too, which added 0.9 percent after the bank said it sees Tullow's valuation around 1.7 times price-to-book 2019 for a business that it thinks can deliver around 17 percent return on equity given its significant forward exploration programme.

Investors cheered International Airlines

, up 3.1 percent, after sources said the owner of British Airways will extend its global reach when Qatar Airways becomes the first Gulf carrier to join the oneworld alliance of airlines.

Illustrating the choppy nature of the market, British plumbing and building supplies group Wolseley

swung

wildly to close down 0.5 percent after it posted a 10 percent rise in full-year profit and proposed a special dividend of 350 million pounds.

M&A is a dominant theme in the UK as cash-rich investors look to snap up historically cheap UK-listed companies.

British TV and media group ITV

climbed 0.7 percent in good trading volumes with traders citing rehashed bid speculation.

Britain's Daily Mail cited speculation linking ITV to a wide-ranging group of potential suitors, ranging from private equity firms to other rival media companies.

"Whilst there's momentum in the story, it won't go away. It would be very foolish to bet against a bid story," says a London-based trader.

BAE Systems , which is being courted by French aerospace and defence peer EADS , climbed 2.1 percent. United Utilities which has been the subject of bid speculation in recent weeks, rose 0.7 percent.

Global M&A deal activity and equities:

(Editing by Stephen Nisbet)

((david.brett@thomsonreuters.com)(020 7542 8099)(Reuters Messaging: Reuters Messaging: david.brett.thomsonreuters.com@reuters.net))

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