FTSE climbs as banks up

"We saw this last week. It’s too early to call any sort of recovery," said Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers. "It’s almost a mini-relief rally, as much as the Fed doing what they can to help Fannie and Freddie so to speak."

"Certainly in terms of the UK and Europe, there are still concerns on the banking front on whether there are more credit writedowns to come."

But with little on the corporate calendar to offer real direction, traders will look to producer prices for June, due at 9:30 a.m., for further clues on inflation.

Bank of England Monetary Policy Committee member Kate Barker was quoted as saying in a newspaper interview on Sunday that Bank policymakers needed to be careful about keeping interest rates so high that the economy slows down too much.

Meanwhile, the Financial Times said banks, fund managers and politicians were to meet on Monday to talk through some of the flaws and inefficiencies of the peculiarly British way in which companies raise capital through rights issues.

ITV SURGES

Among individual stocks, ITV climbed 8.4 percent to top the FTSE 100 leaderboard after the Financial Times quoted the co-founder of producer Endemol as saying a combination of the two companies "could make sense, depending on the numbers".

The broadcaster was also boosted by an upgrade from Morgan Stanley, which raised ITV to "equal-weight" from "underweight".

Petrofac tacked on 3 percent after the British-based oil services company teamed up with Indonesian engineering company IKPT and provisionally won a contract to build an LNG plant in Algeria, government newspaper El Moudjhaid said on Sunday.

Heavyweight Royal Dutch Shell added 0.6 percent after a spokesman for the oil major told Dutch news agency ANP on Friday that it will pull out of Zimbabwe.

In other commodities, mining shares pushed into positive territory to track higher base and precious metal prices, with Rio Tinto , Lonmin , BHP Billiton and Xstrata down 1.3-2 percent.

Shares in Diageo and SABMiller both rose 2.9 percent after U.S. brewer Anheuser-Busch accepted a sweetened $52 billion (26.2 billion pound) takeover bid from Belgium-based InBev to create the world’s largest beer maker.

"You are going to get investors bargain-hunting slightly," said Hargreaves Lansdown’s Hunter. "I wouldn’t say at this stage that this is anything like a recovery. Concerns that were around last week -- general inflation, economic difficulties, banks, property market -- remain."

Wolseley reversed earlier losses to add 1 percent ahead of a planned trading update on Wednesday, with media reports that the building materials distributor will outline plans to cut hundreds of jobs.

Among the few decliners, Reed Elsevier dipped 0.5 percent. The Anglo-Dutch publisher begun searching for a successor to its long-serving chief executive, Crispin Davis, British newspapers reported on Sunday.

Friends Provident shed 0.5 percent after it took the decision to retain its 100 percent ownership of Pantheon Financial Limited.

(Additional reporting by Dominic Lau; Editing by Paul Bolding)