FTSE falls 0.7% early on banks; commodities support

* FTSE 100 falls 0.7 pct * Banks lead losses * Commodities track firmer crude, metal prices (For a TAKE A LOOK on U.S. bailout plan, click on [ID:nN21839395])

By Dominic Lau

LONDON, Sept 22 (Reuters) - Britain's leading share index fell 0.7 percent early on Monday, led by banks as investors awaited details of a $700 billion U.S. package to rescue the sector, while firmer commodity stocks offered some support.

By 0749 GMT, the FTSE 100 .FTSE was down 38.2 points at 5,274.8, after rallying 8.8 percent on Friday -- its largest ever daily percentage gain, on hopes a U.S. government plan for toxic debt and on a ban on short-selling financial stocks.

However, the UK benchmark was still down 1.9 percent last week after Lehman Brothers (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) filed for bankruptcy protection, insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz) required a bailout from the U.S. authorities and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) took over Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz).

U.S. government officials and Congress on Sunday ramped up talks on an unprecedented $700 billion bank bailout as they battled the clock to prevent further financial market turmoil that risks hurtling the economy into a deep and damaging recession.

"We still have a long way to go because the package has got to be approved by Congress. It mainly pertains to the U.S. rather than to the UK," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"The U.S. authorities are trying very hard to encourage other governments throughout the world to do something similar. We will wait and see how much success they have with that," he said.

Batstone-Carr said concerns were switching to the U.S. fiscal position, with the dollar falling against the yen and the euro, and the market was watching it nervously on how the development unfolded.

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) slipped 2.6 percent. A person familiar with the matter said the UK bank would bid for parts of Lehman Brothers' European business after buying Lehman's core U.S. broker-dealer business in a $1.75 billion deal last week. A downgrade from JPMorgan to "underweight" from "neutral" also weighed on the stock.

Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) lost 1.6 percent after the Independent on Sunday said that the lender was looking for property agents to oversee the closure of 700 high street branches once its planned takeover of HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) completes. HBOS shares were down 2.9 percent.

JPMorgan kept the UK banking sector "underweight", saying British banks had a capital gap of 38 billion pounds.

Within the UK banking sector, HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) fell 4.5 and 2 percent, respectively.

Mid-cap Bradford & Bingley (BB.L: Quote, Profile, Research, Stock Buzz) surged 8.1 percent after the Sunday Telegraph said the UK Financial Services Authority has contacted three global banks to discuss a takeover of the troubled buy-to-let lender.

JPMorgan was bearish on the stock, removing its price target and keeping its "underweight" rating. "We do not believe it is a viable standalone entity," the broker said in a note.

London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz) dropped 7.4 percent after the Times said Nasdaq OMX would begin limited trading in UK shares and build up over the next few weeks to challenge LSE's position.

Plumbing and heating materials distributor Wolseley (WOS.L: Quote, Profile, Research, Stock Buzz) gained 3.5 percent after it said it has no plans to raise equity or renegotiate banking covenants, although those options remain should market conditions deteriorate dramatically.

Miners rose along with higher metal prices. BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz), Kazakhmys (KAZ.L: Quote, Profile, Research, Stock Buzz) and Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz) added 1.8 to 3.9 percent.

Energy stocks were also in demand as crude prices CLc1 firmed above $105 a barrel. BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), BG Group (BG.L: Quote, Profile, Research, Stock Buzz) and Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) advanced between 0.8 and 2.2 percent.

Among mid-caps, Yell Group (YELL.L: Quote, Profile, Research, Stock Buzz) slipped 2.5 percent after the directories company said it was suspending its dividend payments as part of a plan to reduce its debts. Carphone Warehouse (CPW.L: Quote, Profile, Research, Stock Buzz) lost 2.3 percent after the Sunday Times said the group had put forward an offer of below 450 million pounds for the British arm of Italian broadband operator Tiscali (TIS.MI: Quote, Profile, Research, Stock Buzz). (Editing by Paul Bolding)