* FTSE up 0.5 percent; European auctions ease debt fears
* Banks rise; UK inflation starts to fall
* BSkyB gains after rejecting News Corp offer
By David Brett
LONDON, June 15 (Reuters) - Britain's top shares were higher by midday on Tuesday, led by a rally from banks as demand for European government debt helped lift sentiment, with BSkyB <BSY.L> up after an approach by News Corp <NWSA.O>.
By 1116 GMT, the FTSE 100 index <
> rose 23.86 points, or 0.5 percent, to 5,225.89, having closed up 0.7 percent on Tuesday at its highest closing level since June 3 and notching up a four-session winning streak."Equity markets have continued to trade in a fairly volatile range over the past weeks, gyrating between their lows and significant resistance levels at or around their 200-day moving averages," said Michael Hewson, market analyst at CMC Markets.
Hewson said the next key level for the FTSE 100 would be 5,255.20, but added "even if it does (break through) an even bigger obstacle lies in its way at the 200-day moving average at 5,325".
The FTSE 100 index reversed earlier losses after Spain's Treasury raised 5.2 billion euros ($6.98 billion) at its 12 and 18-month T-bill auction on Tuesday, while Belgium raised 2.5 billion euros in a heavily oversubscribed auction, and Ireland sold 1.5 billion euros in bonds.
These auctions helped eased initial fresh anxiety over the euro zone debt situation after Moody's on Monday downgraded Greece's debt to junk status.
Banks, which potentially have a large exposure to Europe's debt crisis, rallied in volatile trade. Barclays <BARC.L>, Royal Bank of Scotland <RBS.L> Lloyds Banking Group <LLOY.L>, HSBC <HSBA.L> and Standard Chartered <STAN.L> added 0.1-1.8 percent.
Also helping out was news that British consumer price inflation fell slightly more than expected in May, helped by lower food costs, boosting hopes that inflation is on a downward path.
Energy shares were in positive territory, largely helped by a 1.1 percent gain for embattled BP <BP.L> as bargain hunters moved in on a stock that has fallen 45 percent since its oil spill in the Gulf of Mexico in mid-April.
But BP shares had wobbled after ratings agency Fitch downgraded the oil major's debt rating.
BP's U.S. chief Lamar McKay faces accusations in Congress on Tuesday that the energy giant caused the worst oil spill in U.S. history with a calculated strategy to cut costs, hours before President Barack Obama uses a televised address to defend his handling of the disaster. [
]Peer Royal Dutch Shell <RDSa.L> climbed 0.4 percent, but BG Group <BG.L> eased back 0.2 percent.
SKY'S THE LIMIT
Pay-TV firm BSkyB <BSY.L> soared over 19 percent after it rejected a proposal by major shareholder News Corp <NWSA.O> to buy the rest of the company in a deal that would value BSkyB at 12.3 billion pounds ($19 billion) but said it would recommend a higher offer. [
]Elsewhere, InterContinental Hotels <IHG.L> gained 3.6 percent, rising for a fifth straight day, buoyed by target price hikes from Morgan Stanley and Societe Generale following recent investor days from the company and upbeat sector newsflow.
Whitbread <WTB.L> also put on 3.5 percent ahead of a trading update from the hotel and coffee shop operator on June 22.
Tesco <TSCO.L> was 2 percent higher after the world's number three retailer said the global economic recovery was building and growth in its main UK market would pick up after quarterly sales were hit by lower food price inflation and higher fuel costs.
And ICAP <IAP.L> rose 2.4 percent as Numis Securities upped its rating for the interdealer broker.
On the downside, Inmarsat <ISA.L> shed 4.5 percent, topping the list of blue chip <
> fallers, after BofA Merrill Lynch downgraded its rating for the satellites operator. (Editing by Sharon Lindores) ($1=.7453 Euro) ($1=.6823 Pound)