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Britain's FTSE edges higher as defensive stocks climb

* FTSE 100 closes up 0.3 percent at 5,825.81 points

* Traders say technical levels favouring FTSE at present

* Concerns over Spanish debt crisis may cap further moves higher

* Intl Airlines Group and ARM top FTSE 100 leaderboard By Sudip Kar-Gupta

LONDON, Oct 3 (Reuters) - Britain's benchmark share index rose on Wednesday, driven by gains in "defensive" stocks seen as the most resilient to an economic downturn, although traders said concerns over Spain's debt crisis could limit further rises.

The blue-chip FTSE 100 index closed up 0.3 percent, or 16.36 points higher, at 5,825.81 points.

Increases in heavyweight "defensive" stocks such as global bank HSBC , telecoms group Vodafone and oil major BP , all of which are often favoured for their dividend yields, contributed to much of the rise on the FTSE.

Traders said the fact that the FTSE had held above 5,800 points, seen as key by technical traders to propelling further gains, was also encouraging investors to buy the index.

The FTSE 100 also stayed above its 200-day simple moving average level around 5,700 points, another sign to technical traders that it has room for more gains.

"On a technical basis, it's looking sound. All the moving averages are looking positive," said Central Markets chief strategist Richard Perry.

LOW BOND YIELDS DRIVING INVESTORS TO EQUITIES

International Airlines Group , formed by the merger of British Airways and Iberia, topped the FTSE 100 leaderboard with a rise of around 3 percent as it reported a rise in September traffic numbers.

Software company ARM also rose 2.1 percent, with traders citing speculation that it could benefit from the launch of a new iPad device by Apple , which uses ARM's technology for its products.

Yet Perry and other dealers said lingering uncertainty over when Spain may seek a full sovereign bailout could cap further moves higher on the FTSE 100.

"I see the market trading sideways to slightly softer. We need a catalyst, and that catalyst has to be Spain. The market is concerned that there might be a delay to Spain seeking aid," said Hartmann Capital trader Basil Petrides.

The FTSE 100 has risen around 11 percent from a year-low of 5,229.76 points on June 1, as equity markets were boosted by steps taken by central banks from July onwards to inject fresh liquidity and fend off a global economic slowdown.

Yet it has been stuck within a tight trading range of around 100 points over the past week.

EGR Broking managing director Steven Mayne did not expect the FTSE 100 to advance much further in the coming sessions, due to the underlying concerns over the economy and the euro zone debt crisis.

However, the central banks' injection of liquidity has pushed benchmark bond yields to such historically low levels that many investors have favoured equities over bonds or cash due to the better yields on offer via equity dividends.

According to Thomson Reuters Starmine data, the broader FTSE 350 index has an average dividend yield of 3.5 percent, better than yields of around 1.7 percent on benchmark 10-year UK government bonds.

"Money is coming into equities through default," said Mirabaud Securities analyst Steve Clayton.

(Editing by Hugh Lawson)

((sudip.kargupta@thomsonreuters.com)(+44 207 542 2773)(Reuters Messaging: sudip.kargupta.thomsonreuters.com@reuters.net))

Keywords: MARKETS BRITAIN STOCKS/CLOSE