Banks led the benchmark index lower on Friday, following two days of gains, while miners edged higher led by Xstrata after the miner updated the market on its merger with commodities trader Glencore .

At 09:00 a.m., London's blue-chip index <.FTSE> was down 11.44 points, or 0.2 percent, at 5,699.02, having gained 2 percent over the previous two sessions as better Chinese lending figures fuelled talk the world's biggest metals consumer would report strong economic growth, boosting mining stocks.

In the event, the Chinese figures on Friday proved weaker than expected, prodding stock markets across Europe lower, but mining stocks remained broadly stronger.

The rumours about China GDP proved to have been entirely misinformed ... but (China) remains on the steady glide path towards a soft landing, said Ian Williams, equity strategist at Peel Hunt.

The monthly data showed fixed investment slowing to +21 percent year-on-year but retail sales at +15 percent yr/yr and industrial output +12 percent yr/yr both picked up in March, hence a generally sanguine market reaction, he said.

With China still growing, albeit at a slower rate, investors remain optimistic that demand forecasts for miners <.FTNMX1770> remain achievable, helping the sector edge tentatively higher in early trade.

Technical factors helped too with the sector in bear market territory, well below the trend line established back in September and its 200-day moving average, although it is edging away from oversold territory, suggesting limited upside potential without further catalysts.

Xstrata rose 1.1 percent after announcing an update on the timing of its merger with Glencore and said it is holding constructive discussions with regulatory authorities.

We expect shares of Glencore and shares of Xstrata to outperform between now and the Xstrata shareholder vote (likely to be late May/early June) as technical factors should support the Glencore share price between now and then. Xstrata's share price should move roughly in line with Glencore's share price, Jefferies said in a note.

Integrated oils were lifted by a 1.3 percent bounce in Royal Dutch Shell shares, which regained some ground after sharp falls on Thursday on Gulf of Mexico oil spill fears.

JP Morgan said the market reaction to the news looks overdone, but until the facts are known that is how the market now reacts to environmental risk.

From what we know, this situation does not share any of the event signatures of either Macondo or Elgin-Franklin. If the oil in the sheen is not sourced to either the Mars or Ursa fields, it could well be sourced to a natural oil seep at the seabed - these are very common in the Gulf of Mexico, JP Morgan said.

BANKS WANE

UK-listed banks <.FTNMX8350> were the top faller on the FTSE 100, as investors banked profits on gains of about 3.5 percent in the past two trading days.

London's blue chip index has found support around the 5,580 level, which is its 200-day moving average and trend line stretching back to September.

The index has also bounced off near oversold levels according to its relative strength index, having fallen 3.1 percent over the last month on fears of a slowdown in the U.S. and Chinese economies and Europe's debt crisis.

Renewed Eurozone sovereign stress will keep many investors sidelined. So too will the probable levelling off of positive global growth surprises. Equities will gain little support from Q1 2012 earnings, given cresting corporate profit margins and modest revenue growth, UBS said in a note, as it trims but not does not eliminate its overweight recommendation on global equities.

The bank said concerns about the US and Chinese recoveries appear overdone and corporate fundamentals remain solid.

Cyclically- and market-sensitive plays are likely to underperform. Quality plays, with a focus on dividend growth and income (e.g., in high-yield corporate credit or REITs), are likely to do better, UBS said.

For the time being, defensives led the FTSE lower with drugmaker GlaxoSmithKline and Vodafone down 0.9 and 1.1 percent respectively, as investors stocked up on cheaper cyclical plays.

Also weighing on the downside was British accountancy software group Sage , which fell 1.9 percent as Jefferies cut its recommendation on the firm to hold from buy.

Despite the prospect of an exciting medium-term organic revenue growth contribution from the X3 upper mid-market product set, shorter-term traction here is trickier to decipher, Jefferies said in a note.

In the absence of any pronounced end-market recovery, we are tempering our group growth assumptions for FY12E, with a modestly improved EBIT margin expectation, the broker said.

(Written by David Brett; editing by Tim Pearce)