Greek bailout hold-up leaves FTSE vulnerable

* FTSE 100 down 0.6 percent

* Kingfisher retreats after fourth-quarter update

* BAE Systems drops, sees weak sales as cuts bite

By Tricia Wright

LONDON, Feb 16 (Reuters) - Britain's top shares fell on Thursday as a further hold-up in a second bailout package for debt-laden Greece fuelled risk aversion, leaving the index poised to breach the bottom of its recent trading range.

Compounding investor anxiety, Moody's warned on Thursday that it may cut the credit ratings of a group of top financial institutions.

Banks, strong gainers in the previous session, suffered sharp falls as investors rotated out of the sector, whose share price moves are closely allied to the vagaries of the euro zone debt crisis.

The FTSE 100 leader board was peppered with defensive stocks, with drugmaker Shire and utilities Severn Trent and National Grid up 0.2-0.3 percent.

In further evidence that nervousness was growing, the FTSE 100 volatility index jumped almost 8 percent to a four-week high.

The UK benchmark index was down 36.69 points, or 0.6 percent, at 5,855.47 by 0944 GMT, having closed 0.1 percent lower on Wednesday.

Technical analysts said that a close below 5,839, the bottom end of a tight trading range seen since Feb. 3, could be a bearish sign.

James Hyerczyk, analyst at Autochartist, pointed out that the higher-high, lower-close formation seen on Wednesday was the second such chart pattern seen this week, and should be interpreted as a serious clue that sellers are beginning to take control of the market.

Among companies reporting results, BAE Systems was a faller, off 2.6 percent, after the defence contractor forecast flat sales in 2012 and reported a 7 percent fall in full-year profit, hit by continued cuts to military spending by the United States and Britain.

Reed Elsevier, however, which expects more revenue and profit growth in 2012, advanced 1 percent, the top blue chip riser.

Kingfisher shed 1.5 percent, having closed at its highest level in near eight months in the previous session, as investors banked profits. Europe's biggest home improvements retailer said it would meet forecasts for a 20 percent rise in year profit.

In spite of uncertainty over the outlook for Greece, investment trust Witan's Andrew Bell remains fully invested, saying if the news continues to support the 'muddling through' option, equities look quite cheap, especially relative to deposits or government bonds.

The dividend yield on FTSE 100 stocks is 4 percent, according Thomson Reuters data.

"The risk of miscalculation remains (e.g. Greece), but global monetary policy is much looser than when the wobbles of 2010-11 occurred, so the line of least resistance is for equities to rise," said Bell, chief executive of the 1.1 billion pound trust.

Citigroup, in a note, concurred with this view, seeing more upside in global equities even after a 20 percent rally from October lows, with its year-end target implying a further 11 percent gain.