Britain's FTSE buoyed by StanChart and Sainsbury

* FTSE 100 up 0.4 percent, though still close to 3-month lows

* Sainsbury update lifts heavily shorted supermarkets

* Standard Chartered (HKSE: 2888.HK - news) rises on tax change hopes

* Weir falls after warning of tough market conditions (Adds quotes, details)

By Sudip Kar-Gupta and Alistair Smout

LONDON, June 10 (Reuters) - Britain's main equity index edged up from three-month lows on Wednesday, propped up by advances in banking group Standard Chartered and supermarket group Sainsbury.

Shares (Berlin: DI6.BE - news) in Sainsbury were up 4.6 percent, even though the firm reported a sixth straight quarter of declining underlying sales.

However, some analysts said the company had performed ahead of market expectations, with extensive "short" positions in supermarket stocks indicating that much of the market was positioned for disappointing numbers.

"Despite the difficult market conditions, management is confident that it is making good progress with its strategy," Brewin Dolphin (LSE: BRW.L - news) equity analyst Nicla Di Palma said in a note.

"Even at these levels, Sainsbury's profitability will be significantly better than its listed peers ... we continue to believe that Sainsbury is the best placed amongst the three listed supermarkets."

Sainsbury's rise also pulled up the shares of rivals such as Tesco (Xetra: 852647 - news) and Morrison. Negative bets against British supermarket stocks are at record highs, according to the financial information firm Markit (NasdaqGS: MRKT - news) , and stocks can be squeezed upwards when these positions are closed.

Standard Chartered rose 4 percent, with traders citing the possibility that British Finance Minister George Osborne might change a levy on the British banking industry at a speech later on Wednesday as supporting the stock.

Any move to re-focus the levy back onto the UK balance sheets of global banks would benefit Standard Chartered, as the vastly greater share of Standard Chartered's business is conducted outside Britain, traders said.

"Stan Chart has guided to a $540 million levy this year (340 million pounds), so changing the levy to UK-only balance sheets would be very beneficial for Stan Chart," said Mike Trippitt, director of banks equity research at Numis Securities.

The blue-chip FTSE 100 index rose 26.22 points, or 0.4 percent, to 6,780.02 points at 1011 GMT, bouncing from its lowest close since mid-March and more than 5 percent below a record high of 7,122.74 points hit in April.

Engineer Weir Group was the worst-performing FTSE 100 stock in percentage terms, dropping 2.9 percent after warning of tough conditions for its unit dealing with the oil and gas sector.

(Additional reporting by Tricia Wright; Editing by Kevin Liffey)