* FTSE 100 up 3.1 pct

* Banks and commodities lead gains

* German court ruling supports index

By Tricia Wright

LONDON, Sept 7 (Reuters) – Britain’s top share index notched
up solid gains on Wednesday, led by banks and commodities, as
investors sought out bargains among battered stocks.

Analysts, however, reckoned the rally was unsustainable.

The FTSE 100 ended 161.75 points, or 3.1 percent,
higher at 5,318.59, building on Tuesday’s 1.1 percent advance.
It had shed nearly 6 percent in the previous two sessions.

“I think that investors are very nervous,” Peter Dixon,
economist at Commerzbank, said.

“They’ll pick up bargains when they think there is a good
opportunity (but) they probably won’t want to hold them for too
long and they’ll probably sell in any decent rally.”

Given recent extreme market volatility, he was reluctant to
extrapolate too far ahead, but said near term, the FTSE 100
would likely stay trapped in a range of 5,000 to 5,500.

Barclays Capital’s chief European technical strategist, Phil
Roberts, concurred, saying the index was undergoing a “choppy
recovery phase which is going to be quite slow”.

Roberts said near-term resistance lies at around 5,437 to
5,449 — 5,437 being the 50-percent retracement of the entire
decline off the high in July to the low in August, and 5,449 the
September peak.

He reckoned the index will push through this area, perhaps
making it to 5,500 before coming back down.

The FTSE 100 carries a one-year forward price-to-earnings
ratio of 8.7 times, well below a 10-year average of 14, Thomson
Reuters Datastream showed.

A German court ruling smoothing the way for the country’s
involvement in bailouts for Greece or other euro zone members
also helped the rally.

Banks were among the top sector performers –
led by Lloyds Banking Group , up 6.4 percent, while
Barclays and Royal Bank of Scotland climbed 6.1
percent.

Other perceived higher risk assets found favour, with
integrated oil stocks and miners
tracking strong respective advances in the crude CLc1 and
metals prices .

BP added 4 percent, helped by news its partner
Chevron has made a deepwater discovery in the Gulf of
Mexico at the Moccasin prospect in which BP has a 43.75 percent
stake.

The market’s risk-on mode proved detrimental to precious
metals miner Randgold Resources , the UK blue-chip
index’s heaviest faller, down 2.3 percent, retreating alongside
the spot gold price .

Imperial Tobacco was the second-biggest FTSE 100
faller, down 1.9 percent, as Goldman Sachs downgraded its rating
to “neutral” in a review of European consumer goods.

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(Reporting by Tricia Wright)