Banks underpin rise on Britain's FTSE in thin trade
* FTSE 100 up 0.8 percent
* British banks outperform European peers
* Intercontinental Hotels lead after hotel sale
* M&A talk affects both Johnson Matthey and Reckitt
LONDON, March 28 (Reuters) - Britain's top shares gained on Thursday, with Intercontinental Hotels and Johnson Matthey leading up an index underpinned by a rally in the financials sector in thin pre-Easter trade.
Britain's banks gained 1.2 percent, on course for their biggest gains in two weeks, as Cypriot banks re-opened for the first time in nearly a fortnight after the country's bailout in a relatively calm manner.
"Recently traders have been buying into any dips. You would have thought that with uncertainty over Cyprus that the buying on dips would have calmed down but it's still going on... Banks are robust," Manoj Ladwa, head of trading at TJM Partners, said.
However, only a third of the average 90-day volume was traded by late morning ahead of a four-day weekend for major European markets.
"It's the last day of the first quarter, so we could see repositioning, but going into the long weekend, I don't think traders want to take on any big bets one way or another," Ladwa said.
Banks across Europe received a lift when ratings agency S&P said it did not expect the problems in Cyprus to cause immediate ratings downgrades to euro zone banks.
The FTSE 100 was up 51.15 points, or 0.8 percent, at 6,438.71 by 1227 GMT, with financials, which include banks, asset managers and insurers, adding 13 points to the index.
Intercontinental Hotels Group topped the blue-chip leaderboard, rising 3.6 percent after agreeing to sell a luxury London hotel for $605 million to a Qatari-backed investor.
"The 62 percent premium to book value and earlier-than-expected disposal both increase, in our view, the potential for near-term additional cash shareholder returns as IHG moves further towards its asset-light/free strategy," Investec said in a note, increasing its rating on the stock to "buy" from "hold".
Johnson Matthey was close behind, gaining 3.5 percent in high volume after it completed a 107 million pound acquisition of Swedish formaldehyde producer Formox.
Atif Latif, director of trading at Guardian Stockbrokers, said the acquisition might help to alleviate margin pressures that have been an overhang on the stock over the last few months.
"This may lead to earnings revisions and, with the company having been a weak performer versus the FTSE, this should help alleviate the relative underperformance."
Johnson Matthey has fallen more than 1 percent in 2013 against a rise of around 8 percent on the UK blue-chip index.
Acquisition talk also affected Reckitt Benckiser, which pared early steep losses but still traded down 1.2 percent after a key stakeholder entered takeover talks with D.E Master Blenders, raising fears that shares in Reckitt could be sold to help fund the deal. (Additional reporting by Tricia Wright; editing by Stephen Nisbet)