The blue-chip index closed flat on Tuesday after staging a late recovery on talk that Greece was making progress towards securing a bailout deal and avert a messy default.

The FTSE 100 <.FTSE> gauge ended the session 1.94 points lower at 5,890.26 as gains among banks and oil stocks offset heavy losses in the mining sector, which was hit by signs of slowing demand in China and a mixed reception to a proposed merger between Glencore and Xstrata .

The Greek government was moving one step closer to clinching a bailout agreement as it prepared a list of painful reforms needed to persuade the European Union and the International Monetary Fund to release a new rescue package, a government official said on Tuesday.

The prospect of avoiding a chaotic default of Greece, which would batter the European financial sector and spark contagion fears in Italy and Spain, helped financial shares, with banking and non-life insurance stocks ending the day up 0.8 percent and 0.7 percent respectively <.FTNMX8350><.FTNMX8530>.

In banking stocks especially...I think the market is being very complacent if they think a Greek default won't happen, said CMC senior market analyst, Michael Hewson.

I think they are positioned that (Greece and international authorities) will come to some form of agreement and move on. But agreeing something and implementing it are two different things: how will it go down if political leaders agree to a further turn of the screw in terms of austerity measures?

Pending a solution in Greece, the general market sentiment remained subdued and defensive shares such as pharmaceutical and food & beverage groups featured among the top gainers, along with oil stocks, which are regarded as a safe source of dividend in a high crude price environment.

Underperforming peers was drug-maker GlaxoSmithKline which reported disappointing fourth quarter results.

Standard & Poor's Capital IQ analyst Sho Matsubara said the release pointed to flattish medium term growth prospects for the British pharmaceutical firm as he cut his price target on the stock and reiterated his sell recommendation.


Xstrata was the biggest FTSE 100 faller, shedding 4.9 percent after commodities trader Glencore inked a $41 billion (25 billion pound) all-share deal to buy the 66 percent of the miner it did not already own at a lower premium than some had expected.

Glencore will offer a 15 percent premium to Xstrata share price last Wednesday, below the 20 percent premium some analysts had expected, causing two key Xstrata shareholders to say they would vote against the deal on valuation grounds.

Shares in Glencore fell 3.8 percent in volume more than four times their 90-day trading average as they aligned to the proposed merger terms, which will see the group issue 2.8 new shares for each Xstrata share.

The deal came as the broader mining sector <.FTNMX1770> fell for a second consecutive session on signs demand from top consumer, China, may be slowing, partly due to weaker demand from crisis-struck Europe.

The world's largest steelmaker, ArcelorMittal , also described Europe as a live concern despite a recent improvement in sentiment.

Miners were still up over 20 percent year to date, helped by strong economic data and revived appetite for risky assets after the European Central Banks injected cash into the market in December to prevent a liquidity squeeze.

Charles Cooper, a mining analyst with Oriel Securities, said the outlook for the sector was now mixed, due to varying prospects for commodity prices.

Copper inventories are falling and overall supply of copper could disappoint again this year, which means we've still got tight market supporting high prices, Cooper said.

Elsewhere, there are zinc and aluminium with current spot prices quite close to marginal capacities. We've seen big prices in coal, particularly on the metallurgical coal side, due to the problems related to the weather in Queensland last year. We may not necessarily see the same issues this year and prices could come back.

He estimated coal accounted for around 30 percent of Xtrata and Glencore's earnings mix on a combined company basis.

The analyst cited copper-focused Antofagasta and Kazakhmys as two possible beneficiaries if the price of the red metal remained at high levels.

(Editing by Jodie Ginsberg)