UPDATE 7-Copper rallies on government stability plan

* Economic optimism lifts copper after U.S debt rescue plan

* Copper inventories at 19-month highs raise demand worries

* Expectations of Chinese demand revival remain
(Changes headline, adds New York to dateline, recasts, updates with New
York closing copper prices, adds trader comments)

By Agnieszka Flak and Chris Kelly

NEW YORK/LONDON, Sept 19 (Reuters) - Industrial metal copper rallied
sharply on Friday as optimism returned to financial markets amid hopes a
potential U.S. debt rescue plan will stem the fallout from the global
credit crisis.

Copper for delivery in three months MCU3 on the London Metal Exchange
closed at $7,060 a tonne after hitting a session-high of $7,160. It closed
at $6,749 on Thursday when it fell to a nine-month low of $6,625.

In New York, copper for December delivery HGZ8 surged 11.05 cents, or
3.6 percent, to finish at $3.1765 a lb on the New York Mercantile
Exchange's COMEX division.

"This has nothing to do with the metal's fundamentals but is driven by
the financials and the macroeconomic picture," said Bloomsbury Minerals
analyst Chris Welch.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben
Bernanke planned to work through the weekend with Congress on a plan to
deal with toxic bank assets choking the financial system. [ID:nN18512001]

"It should free up lending. If there's a revival in lending, it can
only help housing and other sectors like manufacturing," said Matthew
Zeman, head of trading with LaSalle Futures Group in Chicago. "It's
basically giving the economy kind of a jump-start."

However, analysts said rising stocks on global exchanges would dampen
the optimism.

Stocks of copper in LME warehouses at 19-month highs of 209,800 tonnes,
are nearly double the levels in early May.

"Copper is still quite exposed to the downside because inventories are
rising and it is one of the more sensitive metals to the economy," said
Stephen Briggs, commodity strategist at RBS Global Banking & Markets.

"Demand growth is likely to be very sluggish for some time and the
costs of production are way below current prices."

UNDER PRESSURE

A pick-up in physical activity could provide a boost to metals as it
would alleviate demand concerns, and the narrow spread between copper
prices in Shanghai and London could help boost imports to China, Barclays
Capital said in a note.

"Until this buying emerges and stock builds slow, copper prices are
likely to remain under pressure in the high $6,000s."

China consumes about 25 percent of global copper production, while the
United States is estimated to consume some 15 percent.

While Chinese demand may strengthen as activity resumes after the
Olympics, the outlook for the U.S. construction activity has weakened
substantially.

Standard Chartered cut its price outlook for three-month copper to
$7,000 per tonne for the fourth quarter and said it expected the metal to
stay around that level in early 2009.

Nickel MNI3 recovered from an earlier two-year low of $16,450 to
close at $16,900, up from Thursday's close of $16,750.

Weak demand for stainless steel, widely used in kitchen appliances and
cutlery, has caused nickel prices to tumble by more than 50 percent from
the year's high of $34,700 per tonne marked in early March.

Growth in demand for the metal from the stainless steel industry is
forecast to be just 3-5 percent this year, versus previous expectations of
8-12 percent. [ID:nT30300]

"It all has to do with the general economic market -- people have less
money to spend and are hesitant to replace their domestic items," said
Peter Fish at MEPS, a steel industry consultancy.

LME inventories for aluminium rose sharply over the last month and have
more than doubled since January last year to more than 1.3 million tonnes,
their highest level since March 2004.

Rising stocks and weak demand are expected to cap prices, even though
on Friday aluminium prices were firmer.

Aluminium MAL3 closed at $2,535, up from Thursday's $2,495 and
recovering from an eight-month low of $2,490 reached in the previous
session.

Zinc MZN3 gained to $1,758 from $1,716 and tin MSN3 closed at
$16,900, up from Thursday's last quote of $16,800/16,825.

Lead MPB3 closed at $1,900 from Thursday's close of $1,805, after
earlier hitting a session high of $1,910. The metal was boosted by
short-covering and a 1,350 tonne fall in LME stocks to 69,175 tonnes.
(Editing by Michael Roddy)