FTSE kicks off 2017 on a record high, European stocks firm

* STOXX 600 up 0.7 percent

* FTSE 100 hits record high

* Banks, commodities-linked firms lead (Adds details and quote, updates prices)

By Kit Rees

LONDON, Jan 3 (Reuters) - Strength in financials and commodity-related stocks continued to underpin European equity markets with Britain's FTSE 100 starting the new year at a record high on Tuesday.

The pan-European STOXX 600 index rose 0.7 percent in early deals, climbing to its highest level since December 2015.

Britain's FTSE 100 rose 0.7 to hit a fresh record high of 7,205.21.00 points. The UK blue-chip index had been closed in the previous session for a holiday.

"We've been particularly bullish on the FTSE whilst a lot of people were going short," John Moore, trader at Berkeley Capital (Other OTC: CGHC - news) , said.

"It's just good news all round - gold's up, we've had a bit of a bounce back in oil as well ... propping up the European market, so we've been buying into this in the last week or so. We expect the trend to continue."

Europe's basic resources sector and oil & gas were up 1.2 percent and 0.8 percent respectively, buoyed by rising oil and metals prices.

Among individual stock movers, Italian banks were once again among top risers, with newly merged Banco BPM gaining 5.4 percent on its second day of trading, building on a strong rise in the previous session.

Italian banks slumped more than 38 percent in 2016 on worries about their bad loans.

Fellow banking stocks Credit Suisse (IOB: 0QP5.IL - news) and Bank of Ireland (Other OTC: IRLD - news) were also among top STOXX gainers, with the European banking index rising 1.3 percent.

InterContinental Hotels Group was another top riser, up 3.8 percent and boosted by an upgrade to "overweight" from "equal-weight" from Barclays (LSE: BARC.L - news) , sending IHG's shares to a record high.

Barclays analysts said that they expected IHG's results in February to be a positive catalyst for the stock, and see a benefit from the firm's exposure to the U.S.

A downgrade, however, weighed on shares in British retailer Next (Frankfurt: 779551 - news) , which fell 3.3 percent.

Deutsche Bank (IOB: 0H7D.IL - news) cut its rating on the stock to "hold" from "buy", citing a more challenging year for European general retailers in 2017, especially in the UK, where they expect inflation to lead to softening demand. (Editing by Vikram Subhedar and Dominic Evans)