Britain's FTSE extends gains as inflation holds steady; Next sinks

* FTSE 100 up 0.3 pct

* Next (Frankfurt: 779551 - news) sinks after Berenberg downgrade

* Inflation holds steady in July

* Standard Life Aberdeen shines after Barclays (LSE: BARC.L - news) upgrade

* Oil stocks keep mid-caps muted (Adds quotes on inflation)

By Helen Reid

LONDON, Aug 15 (Reuters) - Britain's FTSE 100 share index rose 0.3 percent on Tuesday, after gains driven by consumer staples and broker upgrades were bolstered by investors' relief that inflationary pressures eased last month.

The pound fell to a five-week low after the data, helping to boost blue-chips, which had seen a sharp sell-off last week.

"The Bank of England was expecting inflation to peak at about 3 percent in October, but the fact it was only 2.6 percent in July might mean that will not be as high as previously thought," said Mike Bell, global market strategist at JP Morgan Asset Management.

"Even (Taiwan OTC: 6436.TWO - news) if inflation had got stronger, I don't think that would be enough to make the Bank raise rates," he added, saying wage growth figures on Wednesday would help to give a read-out on the underlying health of the labour market.

The newly merged asset manager Standard Life Aberdeen climbed again to be the top FTSE gainer, after a double upgrade from Barclays to overweight from underweight.

"Deal synergies at 200 million pounds appear attractive and there is evidence to suggest that previous headwinds of outflows at GARS and Global Emerging Markets (GEM (Shenzhen: 002340.SZ - news) ) at Aberdeen are receding," said Barclays analysts.

Defence and security firm BAE Systems (LSE: BA.L - news) rose 1.3 percent after Goldman Sachs (NYSE: GS-PB - news) added the stock to its "conviction list" and reiterated its "buy" rating.

"We expect program growth, as well as a new Typhoon (combat aircraft) order from Saudi Arabia, to cement the outlook for 2019/2020," it said, adding that BAE had underperformed the FTSE 100 recently and was now trading at a wider-than-usual discount to U.S. peers.

Shire (Xetra: S7E.DE - news) rose 1.8 percent after submitting an application for the marketing of a treatment for dry eye disease.

Next was down 3.4 percent after Berenberg downgraded its rating on the retailer to 'sell' from 'hold', citing the large number of retail outlets it has as a brake on its ability to invest.

"While it was quick to recognise the online opportunity, it has failed to fully adapt its business model, instead focusing on short-term cash flow and profitability," said Berenberg analysts.

Shares (Berlin: DI6.BE - news) in fund supermarket Hargreaves Lansdown (Frankfurt: DMB.F - news) fell 2.9 percent after it reported results, as investors expressed disappointment with a dividend down 15 percent from a year ago

Although inflation seemed to be losing steam, it remained above the Bank of England's target level.

"When it comes to stocks, the impact of inflation is not straightforward," said Kathleen Brooks, analyst at City Index.

"Even though the UK has-above target inflation, growth companies are benefiting from low interest rates, which is why the UK's AIM market has had a stonking year."

Among mid-caps, oil firms Petrofac (Amsterdam: PF6.AS - news) and Tullow Oil (LSE: TLW.L - news) held the index back, down around 4 percent each after crude prices tumbled overnight.

(Reporting by Helen Reid; Editing by Kevin Liffey)