* FTSE 100 index up 0.4 percent
* Cyclicals rebound but consumer staples gain the most
* Investors glad that deposit levy precedent not set
* RBS, Wolseley get Liberum upgrades
By Alistair Smout
LONDON, March 20 (Reuters) - Britain's top share index gained early on Wednesday, recovering from three days of losses, with traders citing optimism that a fresh bailout deal for Cyprus will be struck after lawmakers rejected a deposit tax.
British markets will also be watching finance minister George Osborne's annual budget presentation at 1200 GMT.
Banking and resources stocks rebounded from heavy falls on Tuesday, but consumer staples added the most points to the index as investors remain wary about taking on too much risk while the Cypriot situation is uncertain.
By 0857 GMT, the FTSE 100 was up 27.32 points, or 0.4 percent, at 6,468.64. The index had seen a three-session losing streak for the first time since November 2012.
"Cyprus has called the EU's bluff, and while there's no plan B at this time, they'll come up with something. It's in no-one's interest for Cyprus to go bust, and I wouldn't be surprised to see Russia get involved," Nick Xanders, who heads up European equity strategy at BTIG, said.
"People sold everything yesterday and are buying it back today. The markets are hopeful they'll find some sort of solution."
Cyprus's parliament overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout after market close on Tuesday, but investors remained hopeful that a deal could be struck without a tax on deposits.
The European Central Bank said after the vote it remained committed to providing liquidity within certain limits, while the Cypriot finance minister said he was hopeful of a deal with Russia.
Royal Bank of Scotland, which has significant exposure to the euro zone, was the top riser in early trade, up as much as 2.3 percent.
There had been fears that the unprecedented levy on deposits could make investors jittery about keeping their money in Spanish or Italian banks.
"The fact that they considered it is worrying, but the fact the Cypriots have decided that it's not reasonable is probably better," said BTIG's Xanders.
RBS also benefited from an upgrade from Liberum to "buy" from "hold".
Hopes for a last minute deal over Cyprus helped crude oil and copper to bounce off of multi-month lows, and the mining and energy sectors gained 0.8 and 0.4 percent respectively.
While the cyclicals managed to retrace some of Tuesday's losses, defensive stocks were the preferred play for traders to gain stock exposure without taking on too much risk.
Wolseley was a top gainer, also benefiting from a Liberum upgrade to "buy", rising 1.4 percent.
"We have upgraded EPS estimates ahead of first half results next week as we are convinced that US growth rates are about to accelerate," analysts at Liberum said in a note.
Finance minister Osborne is set to stick with austerity in his 2013-14 budget despite growing calls for a change of course to help the economy out of its rut.
He may announce measures to boost infrastructure investment, however, which could aid construction stocks, and is widely expected to tweak the Bank of England's mandate.
Any suggestion the central bank may be given leeway to weaken sterling further could boost the FTSE's exporters and other dollar revenue earners.
Editing by Catherine Evans