FTSE creeps up in thin trade, Johnson Matthey leads

* FTSE 100 closes up 0.3 percent; trading volumes thin

* Johnson Matthey (LSE: JMAT.L - news) rises on bullish JPMorgan note

* RBS (LSE: RBS.L - news) falls on broker downgrade, U.S. sale talk (Updates with closing prices)

By Tricia Wright

LONDON, Oct (KOSDAQ: 039200.KQ - news) 14 (Reuters) - Britain's FTSE inched higher on Monday, led by catalytic converter maker Johnson Matthey on the back of an analyst rating upgrade, while the slow progress in U.S. debt talks kept any broad market gains in check.

The FTSE 100 closed up by 20.46 points, or 0.3 percent, to 6,507.65 points, having climbed 2.4 percent in the previous two sessions.

Johnson Matthey rose 5.9 percent as traders cited an upgrade from JPMorgan to "overweight" from "neutral".

"Johnson Matthey is at an inflection point," JPMorgan wrote in a research note, seeing potential gains of 35 percent to the current price.

"We expect years of investment in the industrial catalyst market to lead to accelerated growth, benefiting from the swathe of new customer capex driven by Chinese petrochemical self-sustainability and the U.S. shale gas revolution."

Although the market advanced, there was a strong undercurrent of anxiety as reflected in the FTSE volatility index, a crude gauge of investor fear, which jumped XX percent, its biggest one-day percentage rise in two weeks.

Thin trading volumes, meanwhile, suggested many investors were sticking to the sidelines pending fresh developments in Washington. The FTSE 100 has traded at 63 percent of its 90-day daily average.

U.S. Senate negotiations to bring a fiscal crisis to an end showed signs of progress on Sunday, but there were no guarantees the federal government shutdown was about to end or that a historic debt default would be avoided.

"There is little appetite for risk at the moment until investors have some concrete idea of how this is going to play out," said Richard Hunter, head of equities at Hargreaves Lansdown.

"We will almost certainly have a sharp relief rally should the situation be resolved but of course that's not where we are at the moment and the nearer we tick to Thursday nervousness, without a question, is going to increase."

Congress has until Oct. 17 to raise the debt ceiling, or risk defaulting.

Charles Stanley (LSE: CAY.L - news) technical analyst Bill McNamara, while envisaging a rise of around 200 points on the FTSE 100 should a deal be clinched, also cautioned against further nervous trading in the near term.

"If no agreement is reached by Thursday, a re-examination of last week's lows (6,316) looks all too likely," he said.

Downbeat analyst comment weighed on Royal Bank of Scotland on Monday, which fell 1.4 percent after a downgrade to "underperform" by Bank of America Merrill Lynch.

Traders also pointed to weekend newspaper talk that Canada's Toronto-Dominion Bank is considering an 8 billion pound ($12.8 billion) bid for RBS's American retail banking business Citizens (NYSE: CIA - news) as a catalyst for the share price move.

"8 billion is undervaluing the business ... If that was the price then RBS would most definitely be better off partially IPO-ing and getting a bit of the future upside," said Numis Securities analyst Mike Trippitt.

"It is just a rumour; it is by no means a done deal, but in my eyes it would be undervaluing the business for sure." (Editing by Ron Askew)