Britain's FTSE falls on China fears, commodity sell-off

* FTSE 100 closes down 1.7 pct

* Miners hit by commodity price fall

* WPP (LSE: WPP.L - news) drops on China comment

* HSS plummets after price-target cuts

* Betfair gains on merger talk (Updates with closing prices)

By Liisa Tuhkanen

LONDON, Aug 26 (Reuters) - Britain's top share index sank on Wednesday, not far from its lowest closing levels since the end of 2012, as fears about Chinese growth gnawed and a commodities sell-off rattled markets across Europe.

Data showing an unexpected pick-up in UK retail sales and an increase in mortgage approvals offered encouraging signals on the domestic economy but failed to stem selling.

The FTSE 100 index closed down 1.7 percent, to 5,979.20 points, broadly in line with falls in European equities.

The index posted its biggest one-day rise since 2011 on Tuesday after China cut interest rates to calm markets. But investors quickly resumed their focus on the deteriorating outlook for China's economy and its impact on others.

London-listed miners Fresnillo (Other OTC: FNLPF - news) and Randgold fell between 4.6 and 7 percent after gold and copper prices fell. Glencore (Xetra: A1JAGV - news) dropped 3.7 percent.

Some fund managers said they were looking at buying opportunities. More short-term investors said they were selling out of positions taken earlier this week.

"On a short-term basis, I am willing to increase my risk and buy. I believe the market is offering opportunities," AllianceBernstein portfolio manager Michele Patri said.

"But medium-term the situation looks complex. When you see how stocks exposed to global growth are performing, you can really see how investors do not have faith in the outlook."

Shares (Berlin: DI6.BE - news) in advertising group WPP fell 2 percent after the group said trading in China had been "weak" in the second quarter compared with the first. The group reiterated it was on track to hit its full-year sales target, however.

Support services firm Carillion (Other OTC: CIOIF - news) fell 3.7 percent, despite saying it was on track for an increase in revenue this year after it posted a strong first half, boosted by contracts won in 2014 and orders secured in 2015.

Among smaller companies, HSS Hire plummeted 39 percent after the tool and equipment hire company said it expected earnings below market expectations and as Numis and JP Morgan (Other OTC: MGHL - news) cut their price target for the stock.

"A second profit warning within six months of the IPO has reduced our confidence that HSS can deliver growth rates significantly ahead of the market," Numis said in a note.

On the upside, shares in mid-cap Betfair soared 20 percent after the online gambling company and Irish rival Paddy Power said they had reached an agreement in principle on a possible merger, marking the latest in a string of possible tie-ups across the sector. (Editing by Louise Ireland)