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Domestic banks help Britain's FTSE edge ahead

* FTSE 100 up 0.1; mid cap index up 0.2 pct

* Domestic banks RBS, Lloyds buoyed by upgrade

Dominos Pizza rallies as results show UK improvement

By Danilo Masoni

MILAN, Oct 10 (Reuters) - Britain's top share index inched up on Tuesday after finding support in gains among domestic banks Royal Bank of Scotland and Lloyds following a broker upgrade on hopes of a softer exit from the European Union.

Britain's blue-chip FTSE 100 index was up 0.1 percent at 7,515.39 points by 0854 GMT, while the more domestically-focused mid-cap index added 0.2 percent, boosted by some well-received earnings updates.

After hitting record highs in May thanks to the weakness in the pound that followed Britain's decision to leave the EU, the rally in the FTSE has lost steam as sterling strengthened and the Bank of England turned more hawkish.

Uncertainty over Prime Minister Theresa May's grip on the leadership has fuelled worries over a hard Brexit, prompting a fresh sell-off in the pound last week and supporting internationally-exposed UK blue chips.

But the pound bounced back as May vowed to ward off challenges and was up on Tuesday after strong monthly manufacturing data reinforced expectations of a rate hike in November.

Among the biggest gainers were RBS and Lloyds after Credit Suisse upgrade the two stocks to "outperform" and "neutral" respectively.

"We think investor sentiment towards UK domestic bank stocks should improve over the next 12 months as a soft Brexit becomes more likely," analysts at the Swiss bank wrote in a note.

"Our central scenario of low growth, low unemployment and moderate rate rises is supportive for domestic banks' capital generation and we believe earnings risk is to the upside," they added.

Britain and its EU partners clashed on Monday over who should make the next move to unblock Brexit talks. However, May told business leaders on Monday that they could be certain there would be a two-year Brexit transition period, a source told Reuters.

Credit Suisse also downgraded internationally exposed HSBC to underperform but lifted their price target. The stock was up 1 percent.

Gains in financials were offset by weaker energy and materials stocks with oil majors Royal Dutch Shell and heavyweigh miners Rio Tinto and Glencore trading down between 0.4 and 0.9 percent.

BAE Systems was among the top fallers, down 0.9 percent. The British defence company was set to announce up to 2,000 job cuts at plants involved in making the Eurofighter Typhoon fighter jet, whose orders have dried up.

Among mid-caps, Domino's Pizzas rose more than 10 percent, set for its biggest one-day gain since Feb. 2016 after Britain's biggest pizza delivery firm said trading in the third quarter improved in the UK.

Pub operator Marston's also rose, up 4.5 percent, after a well-received trading update that prompted Liberum to affirm its buy rating on the stock.

Pets at Home fell 8 percent after a share placement.

Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon, see cpurl://apps.cp./cms/?pageId=livemarkets (Reporting by Danilo Masoni; Editing by Keith Weir)