UPDATE 1-Weaker sterling spurs turnaround for FTSE 100 as oil and retailers rally


* FTSE 100 up 0.3 pct

* Next leads retailers up after Christmas trading surprise

* Dollar recovery boosts shares (Adds closing prices, details)

LONDON, Jan 3 (Reuters) - Britain's main stock index rose 0.4 percent to within a whisker of its recent record high, reversing an earlier swoon as oil majors jumped higher and the U.S. dollar gained back ground against sterling, helping UK-listed dollar earners.

Oil majors Royal Dutch Shell and BP delivered the biggest boost to the index as crude prices hit new two-and-a-half year highs, rising 1.5 percent and 1.3 percent.

Retailers stole the rest of spotlight after high street stalwart Next delivered a strong Christmas update.

Next jumped 6.7 percent to the top of the index after its trading update surprised investors, with a sales beat driving the company to upgrade its full-year profit forecast.

Cheery results from the first UK retailer to report on the Christmas season caused a rally in retail stocks across the market, delivering relief to investors in a sector facing significant challenges.

Mid and small-caps also jumped, with the FTSE 250 and the FTSE small caps rising 0.3 and 0.5 percent respectively.

Next's update was in stark contrast to the start of 2017 when the retailer issued a profit warning and its shares sank.

But Wednesday's gains only brought it back to November levels before a third-quarter sales miss, and some were sceptical about how significant this sales performance was.

"The Next share price rollercoaster continues," said Mike van Dulken, head of research at Accendo Markets.

"Managements update-by-update tinkering of guidance and sharp share price reactions only goes to reinforce how shareholders remain at the mercy of the UK consumer from one season to the next and exposed to short-termism."

Fashion retailer N Brown rose 7 percent and shares in small-cap department store Debenhams rose 1.2 percent.

Marks & Spencer up 1.3 percent while Primark owner ABF gained 2.1 percent.

The gains across the board in retail were likely to have squeezed the many short sellers betting on the sector's downfall. Of the top ten most-shorted FTSE 100 stocks, five are in retail.

EU regulatory reforms under the MiFID II market directive that came into force on Wednesday had little early impact on the market, traders said.

(Reporting by Helen Reid; Editing by Robin Pomeroy)