Britain's top share index bounced higher in early deals on Tuesday, recovering after sharp falls in the previous session, led by a rally in banks and commodity stocks which had been the biggest fallers on Monday as investors focused on hopes the U.S. Federal Reserve could inject some fresh liquidity into markets.

The U.S. Federal Open Market Committee (FOMC) kicks off its latest two-day meeting on Tuesday, with an announcement on interest rates and any possible further liquidity injections from the Federal Reserve due at 1630 GMT on Wednesday.

At 0805 GMT, the FTSE 100 <.FTSE> index was up 28.19 points, or 0.5 percent at 5,693.76, having dropped 1.9 percent on Monday.

The UK blue chip index almost surrendered the whole of last week's 2 percent advance in one session as political uncertainty in the Netherlands and France and disappointing economic data revived concerns over the euro zone debt crisis.

Uncertainty over the euro zone debt crisis is not going away but markets are trying to focus on the possibility that the Fed could again ride to the rescue - however unlikely it might seem this month, said Andrew Crook, trader at Sucden Financial Private Clients.

Banks <.FTNMX8350> rallied after being hit hard by euro zone debt exposure worries on Monday, with Barclays the best performer, up 2.0 percent ahead of its first-quarter results on Thursday, the first from the domestic sector.

Miners <.FTNMX1770> and integrated oils <.FTNMX0530> also bounced higher supported by steadier commodity prices.

Copper recovered slightly after sharp falls in the previous session, while crude prices held steady as demand fears over euro zone uncertainties were balanced by supply worries over a production stoppage in the North Sea and potential disruptions from Iran.

Royal Dutch Shell added 0.5 percent as the oil major agreed to buy Mozambique-focused explorer Cove Energy in a 1.12 billion pound recommended cash deal, with Shell raising its previous offer to 220 pence a share to match a rival bid from Thailand's PTT

Small cap Cove Energy added 3.9 percent.

Among individual blue chip gainers, AB Foods took on 1.7 percent as the food ingredients and retailing group posted an above-forecast 5 percent rise in earnings to 34.4 pence for its 24-week half-year to March 3 as under-pressure British shoppers turned to its Primark discount fashion stores and as it benefited from high sugar prices.


Capita was by far the biggest FTSE 100 faller, dropping 5.4 percent as the outsourcing group accompanied an upbeat trading statement with the launch of an accelerated book-built placing of around 40 million new shares to raise cash to exploit growth opportunities.

Today's newsflow reinforces our negative stance on Capita, with the group's reliance on acquisitions increasing and organic growth seemingly becoming more working capital-consumptive, against a backdrop of a stretched balance sheet, said Espirito Santo Investment Bank in a note, reiterating its sell stance.

Peer Serco

Among other blue chip fallers, ARM Holdings shed 1.9 percent as its first-quarter results failed to excite, with the chip designer, whose technology powers Apple's iPad, meeting market expectations with a 22 percent rise in first-quarter adjusted pretax profit.

Technical analysis for the FTSE 100 index remained cautious.

Although a trading bounce today looks possible (especially after U.S. stocks closed well above the lows of the session) the path of least resistance remains to the downside. With that in mind it is going to be necessary to keep an eye on the recent low, at 5,595, said Bill McNamara, technical analyst at Charles Stanley.

(Editing by Stephen Nisbet)