* FTSE 100 rises 1.2 pct in volatile session
* Miners gain along with firmer metal prices
* Financials up after AIG rescue, Lloyds-HBOS in merger talk
By Dominic Lau
LONDON, Sept 17 (Reuters) - Britain's top share index rose
1.2 percent in a volatile session by midday on Wednesday, as
miners tracked firmer metal prices and banks gained after a
source said Lloyds TSB <LLOY.L> and HBOS <HBOS.L> were in merger
talks.
By 1054 GMT, the FTSE 100 <> was up 60.3 points at
5,085.9, after swinging between a high of 5,124.4 to a low of
4,961.9.
The UK benchmark fell to its lowest closing level in more
than three years on Tuesday, sliding 3.4 percent and extending
Monday's 3.9 percent fall after U.S. investment bank Lehman
Brothers <LEH.N> filed for bankruptcy protection.
Concerns had also mounted on American International Group
<AIG.N>, but U.S. authorities engineered an $85 billion rescue
package on Tuesday to stave off bankruptcy that could have
thrown world markets into deeper turmoil. []
In Britain, a person familiar with the matter said Lloyds
TSB is in merger talks with top mortgage lender HBOS, which has
been battered lately amid mounting fears about its funding
position. []
Lloyds shares soared nearly 15 percent, and HBOS was down
0.5 percent after trading as much as 51.6 percent lower at one
point.
"The only game in town is the HBOS deal," said Richard
Farquhar, director of dealing at Liontrust.
"It looks like an extremely good deal for Lloyds, that's the
market's interpetation of it, and it's reassuring for the
banking sector that's had an absolutely torrid time of it. But
(banks) are not out of the woods. Big, big problems remain."
Within the banking sector, Barclays <BARC.L> advanced 10.3
percent and Standard Chartered <STAN.L> added 3 percent. But
HSBC <HSBA.L> and Royal Bank of Scotland were down.
Insurers also rebounded, with Prudential <PRU.L>, Old Mutual
<OML.L>, Aviva <AV.L>, Friends Provident <FP.L> and Standard
Life <SL.L> rising between 1.4 and 4.6 percent.
Firmer metal prices lifted mining shares. BHP Billiton
<BLT.L>, Rio Tinto <RIO.L>, Vedanta Resources <VED.L>, Kazakhmys
<KAZ.L> and Lonmin <LMI.L> were up between 1.6 and 5 percent.
Energy stocks were also in demand, rising along with
stronger crude prices <CLc1>. BP <BP.L>, Royal Dutch Shell
<RDSa.L>, BG Group <BG.L> and Cairn Energy <CNE.L> notched up
0.8 to 2.1 percent.
Retailers rode on the coat tail of improved market sentiment
despite the number of Britons claiming unemployment benefit
rising for a seventh consecutive month in August and by its
biggest amount since December 1992. []
Marks & Spencer <MKS.L>, Kingfisher <KGF.L>, Sainsbury
<SBRY.L> and Morrison Supermarkets <MRW.L> gained 0.6 to 2.2
percent.
The Bank of England's Monetary Policy Committee voted 8-1 to
keep interest rates at 5.0 percent this month, with David
Blanchflower calling for a half percentage point cut.
[]
(Additional reporting by Simon Falush, Editing by David Cowell)
