Top share index was in retreat from the previous week's 2012 highs by midday on Monday, with banks falling after recent strong gains and commodity stocks waning on concerns about the strength of Chinese demand.

London's blue-chip index <.FTSE> was down 20.63 points, or 0.4 percent, at 5,944.95 by 11:47 a.m. Despite the fresh year-to-date highs, the FTSE 100 has closed within a tight 25 point range over the past three trading days.

Volumes were light too, with the index trading just 27 percent of 90-day average around midday.

Momentum has struggled in recent days, in spite of improving U.S. news and a general easing of tensions in the eurozone, as investors try to weigh up whether stock indices can push on much more from their recent highs, Chris Beauchamp, market analyst at IG Index, said.

Banks <.FTNMX8350> were the top fallers, with the sector having gained around 5 percent last week and up more than 20 percent in 2012, leaving UK-listed lenders close to overbought levels according their relative strength index.

Sentiment in the sector was hurt as KPMG warned Britain's banks face more pressure on profits, and Barclays Capital forecast investment banking earnings to be down between 15 and 20 percent this year.

In an equity strategy note, JPMorgan Cazenove was bullish on banks and insurers, saying the expectation of a move up in bond yields, supported by a flood of liquidity from central banks, is likely to be welcomed by equities, at least initially, favouring cyclicals and financials, with telcos, pharma and utilities all set to underperform.

JPMorgan Cazenove, however, reduced its rating on the miners <.FTNMX1770>, which fell 0.3 percent, to neutral on valuation grounds.

(The) sector has outperformed year-to-date but increasing China volatility warrants a cut. Rallies driven by cuts in RRR (banks reserve rate requirements) should be used as opportunity to reduce into strength, the investment bank said in a note.

Miners fell in tandem with base metal prices, which weakened after indications of a weakening property market in China added to worries about demand from the top consumer of the metal.

Elsewhere among commodity-linked stocks, Tullow Oil fell 0.5 percent as UBS cut its recommendation on the oil explorer to underweight from neutral on valuation grounds.

NATIONAL GRID CUT

A downgrade to neutral from buy by BofA Merrill Lynch in a broader pan Europe utilities note weighed on National Grid , which fell 1.8 percent.

Consensus expectations for a recovery are in our view not supported by fundamentals, the broker said of the broader sector.

Upcoming dividend payments and the lack of more bad news may offer short-term support, but long term fundamentals remain weak and valuation indicators do not appear attractive enough in our view to make a value call, it said.

BT Group rose 0.8 percent after the Sunday Times reported the telecoms firm was preparing to put up to 1.5 billion pounds into its pension fund in an effort to tackle a huge shortfall - and clinch a multi-million-pound tax credit.

Oriel Securities estimated cash benefits of a large, early top-up payment are a 22 million pounds early payment saving and 6 million pounds savings because the UK corporate tax rate is set to reduce from 26 percent in 2011/12 to 25 percent in 2012/13.

If this prediction comes true, we believe it will be a clear incremental positive for BT's share price, Oriel saID.

Among FTSE 250 <.FTMC> stocks, Misys jumped 7.8 percent after the British software firm warned its largest shareholder and possible suitor ValueAct that the 350 pence a share deal it had agreed with private-equity firm Vista Partners was likely to be the best available.

A slightly weaker opening forecast in the U.S. also pegged the UK blue chip index back, with only housing data due out in later in the session investors were lacking a catalyst to push markets higher.

With almost no U.S. economic data out this afternoon, equities may continue to struggle, as both bulls and bears attempt to work out where the next catalyst, be it positive or negative, is coming from, IG's Beauchamp said.

(Editing by Andrew Callus)