Weak commodity stocks undermine FTSE

Dealers monitor their screens on the trading floor of IG Index in London May 6, 2010.

LONDON (Reuters) - Britain's benchmark share index fell back on Friday after a two-day rally earlier in the week, as heavyweight mining stocks were hit by fresh fears over the global economy and traders sold off positions ahead of a possible weekend bailout deal in Spain.

The blue-chip FTSE 100 .FTSE closed down 0.2 percent, or 12.71 points, at 5,435.08 points. The index rose 3.3 percent over the week and broke above a key technical level of 5,425 points but failed to advance beyond the next technical level of 5,500.

Spain is expected to ask the euro zone for help with recapitalising its banks at the weekend, sources in Brussels and Berlin said on Friday, and traders said they were selling and clearing out positions ahead of any bailout deal for Spain.

"I've been taking profits over the last two days," said EGR Broking managing director Steven Mayne.

"I'd prefer to have a clearer book going into the weekend, and have cash so we can be nimble and move in and out of the market, rather than be stuck in a loss-making position," he added.

Mining stocks, which had risen sharply over the last two days on hopes of new central bank intervention to help the global economy, fell back and dragged the FTSE lower.

Vedanta (VED.L) was the FTSE's worst-performing stock, dropping by 5.1 percent, with rival miner Rio Tinto (RIO.L) (RIO.AX) falling 4.8 percent on concerns that a lack of clear stimulus measures would hurt the global economy and impact demand for their products.

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Mayne said he had sold shares in mining companies such as Centamin Egypt (CEY.L) (CEE.TO) and BHP Billiton (BLT.L) (BHP.AX), in the wake of their short-lived rally this week.

"If you're buying in this market, it's got to be for the short-term," he said.

Utility stocks, often preferred in times of market uncertainty due to their relatively high dividend yields and stable cash flows, were among the best-performing FTSE 100 shares, with Severn Trent (SVT.L) and Centrica (CNA.L) rising 2.7 percent and 2.2 percent respectively.

Outsourcing group Capita (CPI.L) led the FTSE's leaderboard, rising 2.9 percent after winning a new contract worth some 154 million pounds in terms of revenue.

However, traders said the FTSE 100 index was likely to remain stuck in a range of between 5,200-5,500 points due to the lingering uncertainty over the crises in Spain and Greece, which holds elections on June 17 which could determine whether or not the country stays within the euro zone.

JN Financial trader Edward Smyth said he had bought shares in British insurer Aviva (AV.L), and banks Lloyds (LLOY.L), Barclays (BARC.L) and Royal Bank of Scotland (RBS.L) in case the financial sector rebounded after a bailout for the Spanish banking system.

However, Smyth said the prevalent trend remained to sell equities on the back of market rallies, with investors still opting for the safer havens of cash or bonds.

"We're still in a risk-off environment," he said.

(Reporting by Sudip Kar-Gupta; editing by Ron Askew)