Britain's FTSE rallies off three-month low, boosted by StanChart, Sainsbury

* FTSE 100 up 1.1 percent

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

* Sainsbury update reprieves heavily shorted supermarkets

* Weir falls after warning of tough market conditions (Updates with closing prices)

By Alistair Smout and Sudip Kar-Gupta

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

Standard Chartered rose 5.8 percent, with traders citing the possibility that British finance minister George Osborne might announce changes in a tax on the British banking industry when he speaks later on Wednesday.

Any move to re-focus the tax on the UK balance sheets of global banks would benefit Standard Chartered, since the bulk of its 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," said Mike Trippitt, director of banks equity research at Numis Securities.

Traders were also encouraged by new Chief Executive Bill Winters, who told staff on his first day the bank must strengthen its finances and simplify operations to boost returns.

Sainsbury shares rose 4.5 percent. The company reported a sixth straight quarter of declining underlying sales, but some analysts said the company had beat expectations. "Short" positions in supermarket stocks indicated much of the market was positioned for disappointing numbers.

"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," Brewin Dolphin (LSE: BRW.L - news) equity analyst Nicla Di Palma said in a note.

Sainsbury's rise 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.

The FTSE 100 index ended up 76.47 points, or 1.1 percent higher, at 6,782.41 points, recovering from its lowest close since mid-March and extending gains in late trade, as Wall Street rallied and European shares firmed on optimism that Greece could reach a deal with its creditors.

Engineer Weir Group was one of only 4 stocks to end in negative territory, dropping 0.4 percent after warning of tough conditions for its unit dealing with the oil and gas sector.

(Additional reporting by Tricia Wright; Editing by Larry King/Ruth Pitchford)