FTSE rally erased as investors scrutinise Spain deal

LONDON (Reuters) - Britain's top shares saw earlier sharp gains evaporate on Monday, ending the session lower, as euphoria engendered by a Spanish bank rescue package gave way to concerns over its long-term efficacy, as investors eyed the next hazards in the crisis.

The FTSE 100 index .FTSE ended the session down 2.71 points, or 0.1 percent, at 5,432.37, having earlier jumped to a session peak of 5,536.27 after euro zone finance ministers agreed to lend Madrid up to 100 billion euros (80 billion pounds) following months of nervousness in financial markets.

The market's initial advance was eroded by worry that the rescue will heap pressure on the country's fast-rising public debt, whilst sluggish economic growth remains unaddressed, as investors awaited Greece's general election at the weekend which could further dent market sentiment.

"The concern is, when you actually look beyond the headline figures, what really has changed, because there's nothing in this bailout figure that doesn't basically make Spain's debt position even worse," Michael Hewson, senior market analyst at CMC Markets, said.

"Basically it has to go on the sovereign balance sheet. Bond yields are now pushing back up again, and there are no growth measures; there has been no attempt to deal with the underlying structural problems within Europe."

Mike McCudden, head of derivatives at Interactive Investor, meanwhile, said: "As expected the market has taken the Spanish bailout in the manner we are accustomed... buy the rumour sell the fact."

"With Spanish debt to GDP now heading to 90 percent, the bailout for the banks, although welcome, is just the start of a very long and volatile road to recovery."

Banks .FTNMX8350, earlier at the vanguard of the steep surge higher, pared gains to trade almost flat by the close as the realisation dawned that the Spanish bailout did little to change the fundamentals of Europe's pressured economies.

Gains by energy stocks .FTNMX0530 limited the FTSE 100's losses, led by BP (BP.L), up 1.4 percent, after weekend press speculation that it would reach a deal to pay less than $15 billion to settle its 2010 Gulf of Mexico oil spill.

Tesco (TSCO.L) managed to trim earlier losses, ending the session flat, despite the world's third-biggest retailer reporting a drop in quarterly underlying sales in its main British market.

"The amendments it is making to its business model will take time to implement and wash through. However, investors are currently quite impatient ... Today's update is unlikely to change the situation dramatically, such that the market view of the shares as a hold, albeit a strong one, will probably remain in place," said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers.

(editing by Ron Askew)