METALS-Copper rallies to 10-month peak, skepticism grows

* Metals fly on sentiment not fundamentals

* Funds play with nickel (Recasts; updates with NY copper prices and analyst comments, adds NEW YORK dateline/byilne)

By Chris Kelly and Michael Taylor

NEW YORK/LONDON, Aug 13 (Reuters) - Copper led a broad-based advance across the industrial metals complex on Thursday, muscling up to a 10-month high on economic optimism, but analysts said the gains were built on the quicksand of sentiment and could prove short-lived.

On the London Metal Exchange, lead, used to make batteries, rose nearly 5 percent to a session peak at $1,940 a tonne and nickel, a key ingredient for stainless steel, surged more than 8 percent to top out at $21,325, its highest level since August 2008. Zinc stretched to $1,948, its loftiest level since July 2008, and aluminum peaked at $2,092 a tonne, its highest in more than a week.

Benchmark copper MCU3 soared to $6,450 a tonne, the highest since early October, before finishing up $205 at $6,395.

On the New York Mercantile Exchange's COMEX division, copper for September delivery HGU9 rallied 9.05 cents, or 3.2 percent, to settle at $2.9140 a lb, after notching a new 10-1/2-month peak at $2.93 a lb.

Carl Firman, an analyst Virtual Metals, said the positive economic news from the United States and Germany and France -- Europe's two biggest economies -- helped buoy prices across the entire base metal complex.

On Wednesday, the U.S. Federal Reserve said the world's largest economy was showing signs of stabilization after the deepest financial crisis in decades. [ID:nN1272730]

"Obviously, the German numbers are very helpful, the French numbers are very helpful, and that's supporting the copper market today," said Sterling Smith, an analyst for Country Hedging Inc in Inner Grove Heights, Minnesota.

"I think it helps confirm the sentiment that we are beginning a very slow recovery."

Still, others sided with caution, saying a major price correction was due.

"Any good news is very good news and any poor news is discounted," Firman said, adding that any correction to metal prices was most likely to happen this quarter.

Base metals were little affected by data that showed sales at U.S. retailers unexpectedly fell in July and workers filing new claims for jobless benefits rose last week. [ID:nN13227479]

Analysts added that dollar weakness, which makes metals priced in dollars cheaper for holders of other currencies, added to the upside momentum. [USD/]

Also on the radar was the Baltic Exchange's main sea freight index .BADI, which tracks rates to ship dry commodities. The index has fallen nearly 40 percent since hitting 4,291 on June 3, its highest in more than eight months. [ID:nLC49618]