UPDATE 1-FTSE 100 rallies off three-month lows on U.S. debt talk progress
* FTSE 100 gains 1.6 percent, set for best day since July
* Financials rise as short term hike to debt ceiling seen
* FTSE 100 breaks through 200 day moving average
* GKN benefits from target price hike, new director (Updates to add closing prices with no other changes to text)
LONDON, Oct 10 (Reuters) - Britain's top share index bounced off three-month lows early on Thursday as signs of progress on ending the fiscal stalemate in Washington buoyed sentiment, with banks in particular leading the index higher.
Banks rose 2 percent, while financials, which include banks, insurers and asset managers, added 31 points to the FTSE 100 - a third of its rise.
The UK's FTSE 100 closed up 92.58 points, or 1.5 percent, at 6,430.49, with 96 percent of stocks in positive territory in its strongest day since early July.
Equities in Europe mirrored a rebound overnight on Wall Street, which traders attributed to reports that U.S. Republicans were looking to a short-term increase to the government's borrowing authority to buy time for talks on broader policy issues.
"The banks are receiving a lift from the hope that the Republicans and the White House can come to some kind of agreement," Jeremy Batstone-Carr, analyst at Charles Stanley, said.
"But putting a sticking plaster over the problem doesn't really solve it."
The index had fallen over the three previous days to its lowest level since July 3 on worries the U.S. could default on its debt, and traders were wary about reading too much into today's rise given the recent poor performance of the index.
"We haven't really taken part in any rallies that have taken place... and we're hardly in a strong position," Nick Dale-Lace, sales trader at CMC Markets, said.
The index broke back above the 200-day moving average that it had dropped below earlier in the week and hovered near the downtrend line from the September high.
Among the top gainers was GKN, which rose 4.3 percent after RBC raised its target price on the stock and on news that Informa's current finance director Adam Walker is joining next year. (Editing by Ruth Pitchford, Ron Askew)