FTSE lower ahead of Bank decision

LONDON (Reuters) - The top share index fell on Thursday, as banks and miners retreated ahead of the Bank of England's announcement on interest rates and possible comment on quantitative easing.

At 9:56 a.m., the FTSE 100 was down 32.70 points, or 0.6 percent at 5,075.53, after trading at 5,055.49 points before the release of the UK manufacturing data.

Manufacturing output rose faster than expected in September, and at its fastest monthly pace since July 2002, rebounding from August's sharp drop, official data showed.

The benchmark closed 1.4 percent higher on Wednesday, recouping all of Tuesday's 1.3 percent loss when the index fell to its lowest closing level in a month.

"At the moment there seems to be a slight move back towards risk aversion, out of equities and into the likes of gold," said Richard Hunter, head of UK equities at Hargreaves Lansdown.

Banks were in the doldrums as investor confidence was dented by concerns over economic prospects, and with the shake-ups at Royal Bank of Scotland (LSE: RBS.L - news) (RBS) and Lloyds Banking Group (LSE: LLOY.L - news) still weighing on sentiment.

RBS dropped 3.2 percent, Lloyds shed 2.7 percent, with HSBC (LSE: HSBA.L - news) , Standard Chartered (LSE: STAN.L - news) and Barclays (LSE: BARC.L - news) falling 0.8 to 1.7 percent.

"There are some new cautious noises coming out about the strength and duration of any economic recovery," he said.

The Bank is expected to keep interest rates on hold when it announces its decision at 7 a.m.

However, a change is likely to the Bank's quantitative easing programme, with two-thirds of economists polled by Reuters forecasting at least a 25 billion pound increase to 200 billion pounds after the UK economy unexpectedly contracted in the third quarter.

The European Central Bank delivers its interest rate verdict at 7:45 a.m., with economists expecting the ECB to hold rates steady and make no changes to its special lending measures.

The U.S. Federal Reserve on Wednesday vowed to keep rates near zero for "an extended period" and said the recovery of the world's biggest economy would be sluggish.

Insurers were also in negative territory after Swiss insurer Zurich Financial posted earnings a touch below expectations, and as investors digested trading updates from RSA Insurance (LSE: RSA.L - news) and Old Mutual (LSE: OML.L - news) .

Old Mutual fell 2.3 percent. The Anglo-South African insurer reported a 4 percent dip in its third-quarter sales, ahead of analysts' expectations, and said its capital strength had improved thanks to a financial market rebound.

RSA Insurance, meanwhile, dropped 0.6 percent.

Miners retreated, reflecting lower metals prices. Xstrata , BHP Billiton (LSE: BLT.L - news) , Rio Tinto (LSE: RIO.L - news) and Kazakhmys (LSE: KAZ.L - news) fell 2 to 3.7 percent.

Vedanta Resources (LSE: VED.L - news) lost 4.4 percent after its first-half results failed to excite.

Energy stocks were also under pressure, as crude fell 0.6 percent. Cairn Energy (Virt-X: CNE1.VX - news) fell 1.2 percent while Tullow Oil (LSE: TLW.L - news) dropped 0.7 percent, with BG Group (LSE: BG.L - news) , Royal Dutch Shell (Amsterdam: RDSA.AS - news) and BP down 0.5 to 0.9 percent.

Among individual fallers, Invensys (LSE: ISYS.L - news) and Cable & Wireless shed 6.4 and 5.9 percent, respectively, after results from both firms disappointed.

DEFENSIVES IN DEMAND

As economic concerns re-emerged, strength was seen among defensive stocks, as investors looked to assets perceived as safe bets.

Marks & Spencer was a big blue-chip riser, adding 0.8 percent as Deutsche Bank (Xetra: 514000 - news) upgraded its rating on the retailer to "buy," and Nomura and UBS (Virt-X: UBSN.VX - news) lifted their price targets for M&S after it posted forecast-beating figures the previous session.

Vodafone (LSE: VOD.L - news) rose 1.7 percent, also in favour for its defensive attractions, helped by results from Deutsche Telekom (Xetra: 555750 - news) which showed good growth from its mobile business.

(Editing by Erica Billingham)