Britain's FTSE hits one-week high as energy shares rally

* Blue-chip FTSE 100 index up 0.6 pct

* Shell (LSE: RDSB.L - news) leads energy sector higher

* InterContinental Hotels (Other OTC: ICHGF - news) jumps on M&A talk

By Atul Prakash

LONDON, July 30 (Reuters) - Britain's top share index rose for a third straight day on Thursday, with energy shares leading the way following stronger oil prices and a rally in Shell after it announced jobs and spending cuts.

InterContinental Hotels spiked 3.7 percent after the Financial Times reported that the company and rival Starwood Hotels had held early deal talks.

The blue-chip FTSE 100 index was up 0.6 percent at 6,670.42 points by 1421 GMT, after touching a one-week high of 6,697.40 points.

The UK Oil and Gas index surged 3.4 percent, the biggest sectoral gainer, after oil prices rose following a larger-than-expected fall in U.S. crude and gasoline stocks and figures showing a decline in U.S. oil production.

Royal Dutch Shell (Xetra: R6C1.DE - news) led the energy sector higher, with its shares rising nearly 5 percent after the company said it would axe 6,500 jobs this year and step up spending cuts. It plans to increase asset disposals to $50 billion between 2014 and 2018 as it pushes ahead with its proposed $70 billion acquisition of BG Group.

Shares (Berlin: DI6.BE - news) in BG Group (LSE: BG.L - news) jumped more than 4 percent.

"Shell's move of cutting jobs and reducing capex has pleased investors as it's a good way of maintaining a strong dividend culture," Jawaid Afsar, senior trader at Securequity, said.

"Sentiment has also improved as its integration with BG is also going well."

The broader market also got some support from earnings reports. Rolls-Royce rose 2.2 percent despite reporting a 32 percent drop in half-year profits as the numbers came in slightly better than expected after the engine maker slashed its forecasts three times in the past nine months.

Royal Bank Of Scotland (LSE: RBS.L - news) gained 2.5 percent after reporting a modest rise in second-quarter profits, while asset manager Schroders (LSE: SDR.L - news) gained 2 percent after posting forecast-beating first-half profit, helped by strong demand for its fixed income products.

On the downside, engineering and support services firm Babcock dropped nearly 5 percent, the biggest decliner in the FTSE 100 index, with revenue from the defence and security division coming in lower in the first half of the year.

BT Group (LSE: BT-A.L - news) , Britain's broadband market leader, fell 1.2 percent despite posting first-quarter revenue and core earnings in line with forecasts.

"Results were in line with expectations but Global Services performance was disappointing despite all the cost cutting. Broadband disclosure was also slightly weaker than expected," Brenda Kelly, analyst at London Capital Group, said. (Additional reporting by Liisa Tuhkanen in Helsinki and Sudip Kar-Gupta and Tricia Wright in London; Editing by Alison Williams and Susan Fenton)