British blue chips rebound on U.S. data, Xstrata

* FTSE up 1.4 percent on first day of Q4

* Xstrata rises after board back Glencore offer

* Thin volumes underline ongoing caution

By Toni Vorobyova

LONDON, Oct 1 (Reuters) - Britain's FTSE 100 share index rebounded from three-week lows on Monday, bolstered by strong U.S. manufacturing data and prospects of more takeover activity after Xstrata's

board gave long-awaited backing to a bid from Glencore .

Adding to the relatively upbeat investor mood on the first day of the new quarter, Spanish bank stress tests late on Friday revealed no fresh signs of trouble.

That was enough to lure investors back into the FTSE 100, which had fallen 3.2 percent in the previous two weeks. Gains accelerated in afternoon trade after data from the U.S. Institute for Supply Management (ISM) showed the manufacturing sector in the world's biggest economy expanded in September for the first time four months.

"The real economy is not doing that badly," said Mike Ingram, market commentator at brokerage BGC Partners.

"We've had an awful week last week, and it's something of a bounce back from there," he added.

The FTSE 100 closed up 78.38 points or 1.4 percent to 5,820.45, recovering from a three-week low of 5,738.59 points and breaking through a string of mild technical resistance levels at the 60-, 50-,40-, 30-, 20- and 10-day moving averages.

Monday's recovery followed a wave of profit-taking on Friday, the final day of the third quarter. The FTSE 100 had gained 3.1 percent in the quarter thanks to expectations for more stimulus, which were met in September by the U.S. Federal Reserve, the European Central Bank and the Bank of Japan.

The strong U.S. data gave a fresh lift to the mining sector, which was already rebounding after Xstrata's board gave its blessing to leading commodities trader Glencore's bid following weeks of uncertainty.

"On balance we are back at an 80 percent plus probability of the deal going through, with only antitrust and a small vote risk the barriers to a deal," Liberum Capital analyst Ash Lazenby said in a note, reiterating 'buy' on both companies.

"We ... maintain our view that Xstrata is the cheap way in to the combined entity, which remains our sector top pick."

Xstrata shares closed up 2.2 percent, while the mining sector gained 2.4 percent

, contributing around 14 points to the FTSE.

In a sign of caution, however, volumes were relatively muted at just 85 percent of the 90-day daily average, and the FTSE 100 closed below its intra-day high.

"We've seen a bit of profit-taking already today," said a trader at UK brokerage.

Caution is likely to remain as the third-quarter reporting season approaches. UK companies are expected to report an 8.6 percent drop in earnings versus the year-ago period, according to Thomson Reuters Starmine data.

"The question is how well earnings are going to hold up, and there we are likely to get some disappointment both on delivery and on forecasts," Ingram at BGC said.

Given the downside risks to earnings and to global economic growth, strategists at Shore Capital recommended focusing on so-called defensive sectors, which are better placed to ride out such a storm. Companies that provide staples such as food, healthcare and power are often seen as the best bets to hold up in an economic downturn.

(Reporting By Toni Vorobyova; editing by Jane Baird)

(( 207 542 9828)(Reuters Messaging:


For related prices, Reuters users may click on - *

UK stock report FTSE index: techMARK 100 index: FTSE futures: Gilt futures: Smallcap index: FTSE 250 index: FTSE 350 index: Market digest: Top 10 by vol: Top price gainers: Top % gainers: Top price losers: Top % losers:

* For related news, click on - *

UK hot stocks: Wall Street: Gilts report: Euro bond report

Pan European stock report:

Tokyo stocks: HK stocks: Sterling report: Dollar report:

* For company prices, click on - *

Company directory: By sector:

* For pan-European market data, click on - *

European Equities speed guide................

FTSE Eurotop 300 index...........................

DJ STOXX index...................................

Top 10 STOXX sectors........................

Top 10 EUROSTOXX sectors...................

Top 10 Eurotop 300 sectors..................

Top 25 European pct gainers....................

Top 25 European pct losers.....................