FTSE soars 5.1 pct early on U.S. rate cut hopes

* FTSE 100 soars 5.1 pct to 4,127

* U.S. Fed widely expected to cut rates later on Wed

* Banks, commodity rally on rate cut hopes, U.S. gains

By Dominic Lau

LONDON, Oct 29 (Reuters) - Britain's leading share index soared 5.1 percent early on Wednesday, as banks and commodity stocks tracked sharp gains in U.S. and Japanese markets on hopes that central banks worldwide would cut interest rates again.

By 0835 GMT, the FTSE 100 .FTSE was up 201.05 points at 4,127.43, after rising 1.9 percent on Tuesday.

The index is still down more than 15 percent this month, on track for its biggest monthly fall since the crash of 1987.

Banks were among the top performers on the FTSE 100, with the U.S. Federal Reserve widely expected to cut interest rates from the current 1.5 percent at 1815 GMT.

Japan could also follow the U.S. in cutting interest rates this week, a source with knowledge of the matter said, in the latest steps to protect the world's two largest economies from the global financial crisis [ID:nPEK140633].

Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) advanced between 2.8 and 16.8 percent.

Tom Hougaard, chief market strategist at City Index Markets, said he expected the market could be on a month-long rally if the index would have a positive close to the week.

"My thinking here is that we haven't seen the kind of fears that we saw in 1987 or in 1929," Hougaard said. "If there is anything that does worry (me) about my month-long rally, it's that everyone is looking for it. Everyone has been holding out for this rally to come.

"We saw a huge short-covering bounce yesterday in the Dow, but it was just short-covering. I don't think it was general buying. By Friday, we will know whether it will be real or we will head back down again."

Wall Street marked its second-best day ever on Tuesday, with the Dow Jones industrial average .DJI up 10.9 percent, the S&P 500 .SPX up 10.8 percent and the Nasdaq Composite Index .IXIC up 9.5 percent. In Asia, Japan's Nikkei average .N225 surged 7.7 percent.

But Bank of England policymaker Tim Besley said on Tuesday the UK economy was set to weaken further, and interest rate cuts were not a magic bullet as consumption might not respond to changes in borrowing costs. [ID:nLS558838]

Meanwhile, Britain's financial minister Alistair Darling said governments must adapt their economic policies to tackle the fallout from the financial crisis, as speculation grows that Britain is preparing to abandon its fiscal rules limiting borrowing. [ID:nN28393406] Other financial stocks also gained sharply, with insurers Prudential (PRU.L: Quote, Profile, Research, Stock Buzz), Aviva (AV.L: Quote, Profile, Research, Stock Buzz), Standard Life (SL.L: Quote, Profile, Research, Stock Buzz) and Old Mutual (OML.L: Quote, Profile, Research, Stock Buzz) rising between 3.4 and 22.8 percent.

OILS SURGE

Heavyweight energy stocks were the top-weighted gainers, tracking firmer crude prices CLc1. BP (BP.L: Quote, Profile, Research, Stock Buzz) gained 6.5 percent, Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) put on 6.4 percent, and BG Group (BG.L: Quote, Profile, Research, Stock Buzz) added 10.6 percent.

Miners were also in demand, with 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), Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz), Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz) and Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz) climbing 6.3 to 10.8 percent.

Retailers also tracked the market higher, with Marks & Spencer (MKS.L: Quote, Profile, Research, Stock Buzz) up 4.3 percent and Next (NXT.L: Quote, Profile, Research, Stock Buzz) adding 4.9 percent, despite the Times reporting that UK retailers faced a "challenging" run-up to Christmas after high street sales continued to fall in October, according to the Confederation of British Industry. (Editing by Will Waterman)