Britain's leading share index rose 0.5 percent early on Tuesday, drawing strength from a rebound on Wall Street overnight, with gains in banks and miners offsetting weakness in defensive telecoms and pharmaceuticals.

At 0758 GMT, the FTSE 100 .FTSE was up 25.92 points at 5,050.25, after closing up 0.7 percent on Monday.

U.S. stocks bounced back from a four-day losing streak on Monday after ISM data showed the economy's critical services sector expanded for the first time since August 2008.

Miners were boosted by strength in commodity prices which rose on the back of a weakened dollar. Antofagasta (ANTO.L), Eurasian Natural Resources (ENRC.L), Rio Tinto (RIO.L), Kazakhmys (KAZ.L) and Xstrata (XTA.L) rose 1.9-3.1 percent.

Gains on Wall Street is why the index has opened a bit higher today. Miners are the strongest and everything is up across the board due to general positive sentiment, said Sam Wright, equity trader at Spreadex.

The dollar was on the backfoot after a report in the Independent newspaper that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the greenback with a basket of currencies for the trading of oil.

The softer dollar also helped oil prices rise towards $71 a barrel, benefiting oil majors BP (BP.L), BG Group (BG.L), Royal Dutch Shell (RDSa.L) and Tullow Oil (TLW.L), which put on 0.2-1.4 percent.

Banks were higher. HSBC (HSBA.L), Barclays (BARC.L), Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L) rose 0.5-1.3 percent, while Standard Chartered (STAN.L), which received a target price hike from Credit Suisse to 1,185 pence from 1,600 pence, was up 1.2 percent.

Gains were helped by an upgrade to the sector to 'overweight' by Bank of America Merril Lynch strategists who pointed to a healthy financial backdrop and strong earnings trends among banks.

Investors also digested a 4.8 billion euro capital raising by French bank Societe General (SOGN.PA) to enable it to repay state support and pursue growth opportunities. 

Rolls Royce (RR.L) added 2.7 percent after Citi upgraded its outlook on the firm to 'buy' from 'hold' and lifted the stock's target price to 550 pence from 465 pence.

On the downside, Tesco (TSCO.L), the world's third-largest retailer, fell 1.1 percent as slightly weaker-than-expected second quarter sales in Britain offset a rise in first-half profit towards the top end of forecasts. 

Peer WM Morrison (MRW.L) fell 0.1 percent while J Sainsbury (SBRY.L) was up 0.2 percent.

Drugmaker Shire (SHP.L) shed 2.3 percent, pressured by a UBS downgrade on valuation grounds to 'neutral' from 'buy'.

AstraZeneca (AZN.L) lost 1 percent, but GlaxoSmithKline (GSK.L) added 0.5 percent aided by support for its experimental kidney cancer drug Votrient. 

Other defensive issues fell out of favour as investor appetite for riskier equities crept up. Telecommunication company Vodafone (VOD.L) lost 1.1 percent while consumer goods company Unilever (ULVR.L) was down 0.7 percent.

RATES IN FOCUS

The Reserve Bank of Australia raised its cash interest rate by 0.25 point to 3.25 percent on Tuesday, the first of the Group of 20 central banks to raise monetary policy as the global financial crisis eases. 

Investors focus later in the week will be on the Bank of England's Monetary Policy Committee meeting on Thursday.

Analysts polled by Reuters expect the central bank to hold borrowing costs at 0.5 percent and keep the quantitative easing programme at 175 billion pounds.

On the macro front on Tuesday, British industral output numbers, due at 0830 GMT, were seen up 0.2 percent on the month, after a 0.5 percent rise in July, giving a year-on-year decline of 8.7 percent after a 9.3 percent annual fall in July.

Manufacturing output was forecast to rise 0.3 percent, after a 0.9 percent gain in July with the annualised decline slowing to 9.3 percent in August, down from 10.1 percent in July.