FTSE eases off 3-week high as Syria jitters resurface

* FTSE 100 (FTSE: ^FTSE - news) index up 0.2 percent, shedding most of early rise

* Talk of explosions in Damascus temper growth optimism

* Banks led higher by Lloyds target price upgrades

* Airlines recover on better passenger numbers (Updates to reflect market dip, adds quotes, detail)

By Alistair Smout

LONDON, Sept 5 (Reuters) - Britain's top share index traded slightly higher on Thursday, pulling back from an earlier three-week high as nervousness over developments in Syria kept the index rangebound despite a recent pick-up in the economy.

At 1020 GMT, the blue-chip FTSE 100 index was up 11.69 points, or 0.2 percent, at 6,486.43, having shed the bulk of gains of over 1 percent made in early trade.

Adding most points to the index was the financial sector, with Lloyds up 1.6 percent after target price upgrades from both Bernstein and Morgan Stanley (Xetra: 885836 - news) .

Both brokers gave a target price of 100p for the bank which currently trades at 73 pence, as the British government prepares for its transfer into full private ownership.

Jitters over the conflict in Syria, where both Russia and China have warned the United States against military intervention as G20 leaders gather for a summit, pegged the FTSE 100 back.

Illustrating the extent of the market's sensitivity towards rumours about Syria, traders said the index had dropped following a tweet that referred to an unconfirmed report from Wednesday of explosions near the Russian embassy in Damascus.

"I don't think anyone in good conscience can throw risk into the market and leave it, because if there's a missile strike at midnight and you can't get out of your positions, then you're stuck until the opening bell... and that will cap the upside for now," Matt Basi, head of UK sales trading at CMC Markets, said.

"There's is now a lot of cash on the sidelines, however, where people have pulled back from equities, so if the Syrian crisis is dealt with swiftly and in a manner that doesn't cause major panic... then there's definitely room for good upside for the FTSE 100, and we could break through new highs."

Part of the reason for optimism over longer term prospects is the brightening growth picture both for Britain and other parts of the world.

Britain's services sector rose at its fastest rate for over six years, a survey showed on Wednesday, while global manufacturing activity grew at its fastest pace in more than two years last month.

"Investors are still fairly unsure how developments relating to Syria will go. Thus gains, despite stronger macro data of late are likely to be limited," Jeremy Batstone-Carr, head of private client research at Charles Stanley (LSE: CAY.L - news) , said.

Marks and Spencer (LSE: MKS.L - news) was the top individual gainer, up 3.2 percent after an upgrade from HSBC (LSE: HSBA.L - news) .

Airlines, which fell sharply on Wednesday after a profit warning from Ryanair, rebounded strongly, with easyJet and IAG both among top gainers after reporting much stronger traffic figures. (Editing by John Stonestreet)