Blue chip shares rebounded on Monday led by defensive stocks and mining shares while concerns about debt problems in Spain and Italy weighed on banking shares.

British power generator International power led FTSE gains, jumping 3.1 percent on news that French utility GDF Suez had agreed to raise its stake and take full control of the company.

Lloyds Banking Group was the biggest loser, falling more than 2 percent on reports that the Co-op was close to abandoning a bid for Lloyds branches.

The UK blue-chip index <.FTSE> was up 35.4 points, or 0.6 percent at 5,687.23 by 1044 GMT, rebounding after marking its lowest weekly close on Friday since January 13.

The pharmaceuticals, defensive and utilities had a decent bounce this morning. The banks are down off the back of the Spanish and Italians, I think (the FTSE) is driving up by default after a few down days last week, said Rupert Armitage, director at Shore Captial.

Last week was a quiet week because of the Easter holidays, I think there are a few people coming back today and have seen some value in what has been down.

Pharmaceutical stocks Glaxosmithkline and Shire were among the top gainers in early trading, a sector that performs well regardless of market sentiment.

Miners <.FTNMX1770> also rallied as brokers in their equity strategy notes said the sector offered value despite a downward revision on Chinese growth expectations.

The FTSE 100 has fluctuated in recent sessions as fears over the Spanish economy flared up, denting investor sentiment and eroding gains made in the first quarter.

That has been reflected in the FTSE volatility index <.VFTSE>, a crude gauge of investor fear, which has spiked more than 70 percent since mid-March, when concern over Spain's debts started to grow.

Fears over the euro zone persist, putting downward pressure on equities. Exane BNP Paribas said on Monday it remained bearish on European equities, saying they were still too expensive in a world of too much debt and too little growth.

If there is one thing that we have learnt from the past couple of years of European debt, it is that these problems tend not to be resolved quickly and painlessly - and it does set the stage for potentially more volatility in the weeks ahead, said one London-based trader.

Banks <.FTNMX8350> fell as JP Morgan cut its stance on the sector to neutral, in line with its more cautious stance initiated three weeks ago.

There were further bearish signals as redemptions from UK equity funds reached a 35-week high last week, EPFR data showed.

Global equity funds saw net outflows in the week of April 11, halting six weeks of inflows as part of a broad-based retreat from the asset class, data from EPFR Global showed.

The world's largest listed hedge fund firm Man Group was the third-biggest loser on the FTSE 100, dropping 3 percent as JP Morgan reduced its earnings estimates for the firm again and cuts its target price.

M&A ACTIVITY

British power generator International power rose 3.1 percent on its highest volume this month, after French utility GDF Suez agreed to buy the 30 percent of International Power it does not already own for 6.8 billion pounds.

We had thought that there would be an agreed offer at a level closer to our previous price target 'of 417 pence or fractionally higher', and the recommended offer is neatly within this ballpark, Investec Securities said in a note.

Lloyds Banking Group fell 2.4 percent on reports the Co-op is close to abandoning its 1.5 billion pound bid for 632 Lloyds bank branches.

M&A issues also clipped 1.7 percent off International Airlines' share price. Sir Richard Branson's Virgin Atlantic airline is set to appeal against what it claims was Brussels' lightning speed approval last month of the contentious takeover of BMI British Midland by International Airlines Group, the parent company of British Airways, according to reports.

United Utilities (UU) rose 1.3 percent as Nomura repeated its buy rating on the utilities firm, which has underperformed its peer Severn Trent (SVT) recently, as bid speculation swirls around the sector.

SVT might be seen by some as a more likely candidate for a takeover as it is smaller than UU, but nothing we have seen in recent weeks changes our perception of relative probabilities of takeouts for each of the UK water stocks, the broker said.

Gains on the FTSE 100 were supported as Wall Street futures pointed to a firmer open in the U.S.

Across the Atlantic monthly retail sales and New York Federal Reserve manufacturing data are both due for release at 1230 GMT.

Last month both readings showed a pickup in activity, boosting confidence in the world's biggest economy, and investors will be looking for further improvement after recent data which raised doubts about the sustainability of the U.S. recovery.

(Additional reporting by David Brett; Editing by Susan Fenton)