FTSE gains 1.8 pct as energy, miners recover

* FTSE 100 gains 1.8 percent

* Miners, energy stocks lifted by higher commodity prices

* Confidence on financial markets boosted by govt measures

By Simon Falush

LONDON, Oct 20 (Reuters) - The UK's leading index of shares gained 1.8 percent by midday on Monday as confidence grew that the financial crisis may be easing, boosting commodity prices and energy and mining stocks.

By 1029 GMT the FTSE 100 .FTSE was up 71.74 points at 4,134.75 having gained 5.2 percent on Friday.

Governments around the world have pledged about $3.2 trillion to guarantee bank deposits and interbank lending and Dutch bank ING (ING.AS: Quote, Profile, Research, Stock Buzz) became the latest to need government support, with Dutch authorities pumping in $13.5 billion.

Markets were also soothed somewhat by interbank dollar lending rates falling and by a pledge from European Central Bank President Jean-Claude Trichet on Sunday to do what it takes to restore confidence.

Mining stocks were firmer, recovering from recent heavy losses as metals prices bounced back from multi-year lows set last week as fears eased about the extent of the fall-off in demand.

Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz) and Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz) gained between 2 percent and 4.3 percent.

However markets remain skittish and volatile and investors are still reluctant to plunge back into the markets, analysts said.

"It's a bit like tap dancing on thin ice, said Justin Urquhart Stewart, director at Seven Investment Management. "You can enjoy it on days like this, but don't jump up and down too hard because you can go straight through the stuff.

"There are rallies on more positive days, but the overall picture is still highly unreliable."

ENERGY GAINS

Energy stocks rose as oil rose nearly $2 per barrel CLc1 on expectations that OPEC could cut output this week to lift prices which have plunged more than 50 percent from a record high in just three months.

Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) gained 6.2 percent, BP (BP.L: Quote, Profile, Research, Stock Buzz) added 7.1 percent while Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) rose 5 percent.

Some banks benefited as shaky confidence on the financial sector improved slightly with the gummed up interbank lending market starting to ease.

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) added 4.2 percent, Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) advanced 2.3 percent and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) gained 1.9 percent.

Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) added 4.5 percent after the Sunday Times reported private equity firm CVC Capital Partners has teamed up with Swiss Re (RUKN.VX: Quote, Profile, Research, Stock Buzz), the world's largest reinsurance group, to bid for a majority stake in the UK bank's insurance assets.

Gains were tempered by Fitch Ratings on Friday downgrading ratings on Royal Bank of Scotland, citing growing risk and a deteriorating outlook for some of its main businesses. [ID:nN17476641]

The interbank cost of borrowing dollars fell again in Europe on Monday and dollar and euro interest rate swap spreads narrowed as dealers said banks were lending dollars to European banks on Friday rather than simply hoarding cash.

Not all banks were up, however, with heavy-weighted HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) losing 0.9 percent and embattled mortgage bank HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) falling 2.5 percent.

Prudential (PRU.L: Quote, Profile, Research, Stock Buzz) added 12.3 percent after the Sunday Times reported it is in talks with two strategic partners and is eying AIG's Asian business.

Nerves on the state of the global economy were not far from the surface as China reported below-forecast growth and other insurers were in the red.

Aviva (AV.L: Quote, Profile, Research, Stock Buzz), Standard Life (SL.L: Quote, Profile, Research, Stock Buzz) and RSA Insurance Group (RSA.L: Quote, Profile, Research, Stock Buzz) were down between 2.3 and 7.2 percent on lingering concerns about the impact of falling global equity and bond prices on the sector's capital strength.

(Editing by Sharon Lindores)