Britain's FTSE at three-week high, mid-caps hit fresh record

* FTSE 100 up 0.4 pct at 3-week high

* FTSE 250 hits new record high

* Balfour Beatty (Other OTC: BAFBF - news) rises on BofA upgrade

* Sales beat boosts JD Sports to break record

By Helen Reid

LONDON, April 11 (Reuters) - British shares gained on Tuesday, outpacing European markets, while mid and small-caps hit fresh record highs with strong gains from JD Sports and Balfour Beatty driving the index.

Britain's FTSE 100 was up 0.4 percent, at a three-week high, by 0900 GMT. A measure of volatility on the blue-chip index was at a four-month high, though still near historically low levels.

"We still feel that the general context, even now, is that equity markets are probably pricing in too much bad news," said Kevin Gardiner, global investment strategist at Rothschild Private Wealth.

"We think the economic backdrop is less fragile than people have felt, and we are expecting markets to outperform," he added.

The blue-chip index was little changed after statistics showed UK inflation held steady in March, due to the later Easter holidays and a dip in global oil prices, though the squeeze on households' spending looked set to resume soon.

Retail sales figures published earlier showed British shoppers clamped down on spending as the cost of essentials rose.

"Hedging has so far shielded UK non-food retailers and consumers from imported cost inflation," said HSBC analysts.

Randgold Resources, Rio Tinto (Hanover: CRA1.HA - news) and Fresnillo (Amsterdam: FN6.AS - news) were among top blue-chip gainers.

International Consolidated Air and EasyJet (Hamburg: 14862522.HM - news) were up 1.5 and 1.4 percent, gaining after broker Exane set a positive tone on the European airline sector, upgrading its view on German rival Lufthansa (Xetra: LHAB.DE - news) .

"We firmly stand by our view that European and global demand will remain stubbornly strong, notwithstanding the potential impact of geopolitical events," the analysts wrote.

Burberry was among top gainers, up 1.6 percent and tracking other European luxury stocks higher after the world's biggest luxury goods group LVMH beat expectations for its first-quarter sales.

Britain's mid-caps and small-caps climbed to fresh record highs, up 0.4 percent and 0.2 percent respectively, driven by results and broker upgrades.

Construction and support services company Balfour Beatty was the top European gainer, up 6.4 percent after Bank of America Merrill Lynch upgraded the stock to 'buy' on its improved confidence in margin recovery in its key markets.

Retailer JD Sports was the top mid-cap gainer, up 9.7 percent and hitting an all-time high after strong demand for leisure clothing drove a 55 percent rise in pretax profit, its biggest increase in eight years.

Shares (Berlin: DI6.BE - news) in small-cap radio communications firm Sepura dropped 7.7 percent after the Competition and Markets Authority said it was investigating the anticipated acquisition of the firm by Chinese radio company Hytera (Shenzhen: 002583.SZ - news) .

(Reporting by Helen Reid; Editing by Keith Weir)