Britain's FTSE steadies in cautious trade, consumer stocks weigh

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* FTSE 100 flat, mid caps up 0.1 pct

* Pound holds below 2-week highs, dollar-earners fall

* U.S.-China trade talks, U.S. politics keep markets subdued

* Paper, packaging stocks get boost from broker note

By Kit Rees

LONDON, Aug 22 (Reuters) - Britain's top share index held steady on Wednesday in cautious trade as investors kept an eye on U.S.-China trade talks and politics in Washington, while the pound's recent rally weighed on dollar-earners.

The blue-chip FTSE 100 index was flat in percentage terms at 0900 GMT, weighed down by a fall among heavyweight consumer staples stocks. The mid cap index inched 0.1 percent higher.

Even (Taiwan OTC: 6436.TWO - news) though the pound gave up its earlier gains, the currency traded close to its highest in nearly two weeks, a level hit in the previous session.

This kept the pressure on the FTSE's dollar-earning constituents, with big consumer stocks such as Diageo (LSE: DGE.L - news) , British American Tobacco (Kuala Lumpur: 4162.KL - news) and Reckitt Benckiser (Xetra: A0M1W6 - news) all down between 0.4 and 1.4 percent.

The FTSE 100 is down around 1.7 percent this year, and uncertainty over Britain's exit from the European Union has kept investors on edge.

More broadly, Michael Hewson, chief market analyst at CMC (Shanghai: 600327.SS - news) Markets UK, pointed to a "cautious backdrop" for markets after U.S. President Donald Trump's former personal lawyer Michael Cohen testified on Tuesday that Trump had directed him to commit a crime by arranging payments to silence two women.

Investors were also watching Wednesday's trade talks between the United States and China.

While company news was thin on the ground, broker changes prompted some price moves.

“Unhelpful to the London market is the fact that not a single FTSE 100 company has issued corporate results or trading updates on Wednesday. News tends to influence trading volumes," Russ Mould, investment director at AJ Bell, said.

Though Jefferies analysts kept DS Smith (Frankfurt: 877238 - news) 's rating at a "hold", they said they saw a supportive pricing environment and opportunities for further sector consolidation and mergers and acquisitions for the paper and packaging sector.

"We expect the UK listed packaging names to grind higher over the next 12-18 months," Jefferies analysts said in a note.

Shares (Berlin: DI6.BE - news) in Mondi (Frankfurt: KYC.F - news) , which Jefferies called a "long-term quality play", gained 0.6 percent.

Among smaller UK stocks, shares in Grafton Group (LSE: GFTU.L - news) rose 4.8 percent to the top of the mid cap index after the building materials distributor gave a half year update.

"Overall, this looks like a very solid update from Grafton, especially bearing in mind the more cautious update from Travis Perkins," analysts at Investec (LSE: INVP.L - news) said in a note. (Reporting by Kit Rees; Editing by Mark Potter)