(Adds dropped letter 's' to 'lifts' in headline)
* FTSE 100 index gains 0.3 percent
* Higher oil prices help energy stocks
* United Utilities, Severn Trent trade ex-divs
By Atul Prakash
LONDON, June 18 (Reuters) - Britain's top equity index edged higher in cautious trading early on Wednesday, with a rise in crude oil prices following heavy fighting in Iraq underpinning energy shares.
Oil companies such as Royal Dutch Shell, BG Group and Tullow Oil rose 0.3 to 1.0 percent, helping the UK oil and gas index to gain 0.6 percent, the top sectoral performer in the benchmark FTSE 100 index.
"The market is very closely watching the escalating violence in Iraq, a major oil producer. In the short term, higher oil prices may benefit some oil companies, but in the longer term, if it continues, it will result in an oil shock," said Henk Potts, equity strategist at Barclays Wealth.
"Clearly that would be an overall negative for the economy as higher oil prices have the potential to hurt global growth and raise input cost of companies."
Brent crude traded above $113 per barrel as fighting in Iraq shut the country's biggest refinery and led to the withdrawal of staff by foreign oil firms, stoking worries about exports from the key oil producer.
The blue-chip FTSE 100 index was up 0.3 percent at 6,786.53 points by 0802 GMT. The index is up only 0.6 percent so far this year, but trades just less than 3 percent below its record high in late 1999.
However, investors avoided strong bets ahead of the Federal Reserve's two-day policy meeting. The U.S. central bank is widely expected to cut another $10 billion from its monthly bond purchases, while investors will be watching for any comments on when the Fed would begin to raise interest rates and its outlook for the economy.
Data released on Tuesday showed a surprisingly high reading for U.S. inflation, which sparked speculation of a hawkish tilt to the Fed's policy outlook.
Gains were also capped by a 3.8 percent and 2.8 percent fall respectively in shares of United Utilities and Severn Trent as the two companies traded without the attraction of their latest dividend payouts. (Reporting by Atul Prakash; Editing by Hugh Lawson)