Financials and oil stocks lifted Britain's FTSE 100 higher on Monday morning, with analysts saying they expected a sector rotation into cyclicals to continue as confidence grows that European governments will take steps to avoid economic meltdown.

London's blue-chip index <.FTSE> rose 16.87 points, or 0.3 percent, to 5,745.42 by 9:02 a.m., having risen 1.6 percent last week.

Traders said the lack of progress on Greece's debt swap talks, which would see it avoiding a chaotic default, and worries over the future of the euro zone were capping the upside.

The FTSE 100 has risen 2.8 percent this year, leaving it above the 60 percent level on the relative strength index, suggesting stocks are nearing overbought territory.

That may point to a pause for consolidation but macro developments over the weekend should not disrupt the underlying positive momentum, Peel Hunt analyst Ian Williams said.

Banks <.FTNX8350> and insurers <.FTNMX8570> were among the top gainers -- up more than 14 percent and 10 percent, respectively, in 2012 -- as investors respond to central banks steps to inject cash into the financial system and prevent the euro zone's sovereign debt crisis causing a liquidity squeeze.

UBS said risk assets were moving higher as cyclical risk premiums fall in the United States and many emerging economies, including China.

It upgraded its stance on global equities to overweight from neutral, saying: We believe investors should begin to adopt less defensive and incrementally more cyclical positions. As double-dip and financial risks fade, risk premiums should fall to reflect a more stable backdrop, allowing higher PE (price over earnings) multiples, even as earnings growth slows.

Integrated oils <.FTNMX0530> were higher, with Royal Dutch Shell up 0.7 percent as ING started its coverage on the oil major with a buy rating.

Given its production growth with a superior gas position and attractive valuation combined with high yield, we believe RDS (Royal Dutch Shell) is undervalued compared with both the stock market overall and European oil peers.

BAE BEST FORM OF DEFENCE

Defence contractor BAE Systems rose 2.0 percent after Barcalys Capital raised its rating on the firm to overweight from neutral in a broader note on the global aerospace and defence sector.

Among the underperformers as the FTSE 100 has rallied over the past week have been some of last year's winners.

Industrial engineers <.FTNMX2750>, for instance, have shed 1 percent over the past five trading days, as fund managers and investors switched out of safer equities in search of fuelling their portfolios with stocks that look cheaper on valuation grounds.

Weir shed 4 percent as JPMorgan downgraded its recommendation on the pumps and valves maker to neutral from overweight, saying gas price and rig count data was likely to weigh on the shares -- which are up 167 percent over the past two years -- in the near term.

British engineer IMI fell 1.8 percent as UBS cut its rating to neutral from buy, while Credit Suisse said valuation for the company was stretched.

Elsewhere on the downside, perceived defensive stocks such as utility National Grid and household goods firm Reckitt Benckiser , down 0.7 percent and 0.8 percent, fell as investor risk appetite showed no sign of abating.

The FTSE volatility index <.VFTSE> -- a gauge of investors fear -- has fallen more than 16 percent in 2012 as fears of a global financial meltdown have eased.

No major economic data was scheduled in Britain or the United States on Monday.

(Editing by Dan Lalor)