* FTSE 100 up 1 percent to 6,436.20 points
* Lloyds rises on reports of overseas interest, RBS also climbs
* Buy oil, mining stocks on low valuations -Monument
By Francesco Canepa
LONDON, July 8 (Reuters) - Banks led Britain's top share index higher on Monday as speculation about overseas interest in Lloyds Banking Group revived appetite for the sector.
Financial shares added 19.2 points to the FTSE 100, which was up 60.7 points, or 1 percent, at 6,436.20 points at 1043 GMT, with Royal Bank of Scotland the top riser.
Shares in Lloyds rose 2.7 percent to 66.4 pence, testing a 2-1/2 year high, after reports that foreign investors were considering buying up to half the British government's stake in the bank.
"Taking the stake out of government hands and putting it back into the free market is likely to be seen as stock-bullish in the medium term," said Matt Basi, head of UK sales trading at CMC Markets UK.
"The story doesn't have a huge amount of meat on the bone at this stage, so it's a case of clients looking for an excuse to dip their toes back into the water. It's likely we're going to see more of this as the story progresses."
Basi added that bid speculation around Lloyd's was reviving interest in battered RBS, in which Britain also owns a stake it wants to sell.
RBS, up 5.3 percent, extended a rebound from three-month lows hit last week as investors snapped up the stock, which is now trading at 10 times its expected earnings for the next 12 months. It traded at multiple of 13.6 in May, before a 24 percent share price slide, Thomson Reuters data showed.
Energy shares added another 12.3 points to the index.
Traders said investors were hunting for bargains among shares which depend on economic growth, such as oil and mining stocks, after recent data pointed to the U.S. recovery gaining traction. But the outlook for both sectors was clouded by signs of a slowdown in industrial activity in China.
"It's a dangerous and, some would say, stupid idea to suggest buying the miners and the oils, but I find these levels persuasive," said Andy Ash, head of sales trading at Monument Securities.
The integrated oil and gas sector traded at 12.9 times its expected earnings for the next 12 months, a low not seen since December, Thomson Reuters data showed. The specialty mining and metals sector was trading at a 10.5 multiple, a level which triggered a rebound in April. (Editing by Catherine Evans)