Insurer RSA leads FTSE lower after profit warning

* FTSE 100 down 0.3 percent

* RSA knocked by profit warning

* Miners boosted by China HSBC/Markit services PMI (Updates prices, adds quote)

By Tricia Wright

LONDON, Nov 5 (Reuters) - Britain's top share index weakened on Tuesday, with insurer RSA sinking after a profit warning while banks also dropped sharply.

RSA shed 6.3 percent in brisk volume after saying that insured losses caused by recent severe weather in Europe and Canada were "materially above assumptions" and that full-year returns to shareholders were likely to suffer.

ETX Capital's head of trading Joe Rundle, however, remained sanguine on the shares - currently at 121 pence - which found support on Tuesday at their 200-day moving average at 120 pence.

"I would buy them now... It's a short-term hit on profits but what it actually does is increase medium-term profitability because it will push premiums up," he said.

"The cycle of premiums is that they tend to fall until there's some disaster or some event like this, and then they spike back up... so when RSA put their insurance premiums up next month, or next year, everyone thinks 'that's reasonable'... because the risk is fresh in everyone's minds."

Rundle reckoned that, in the next 12 months, the shares could rise as high as 150 pence.

Trading volume in RSA stood at 480 percent of its 90-day daily average, well above the FTSE 100 on 110 percent.

The UK benchmark closed down 16.78 points, or 0.3 percent, at 6,746.84 points, led down by banking stocks which knocked nearly 13 points off the index.

Europe's largest bank HSBC shed 0.7 percent and Barclays (LSE: BARC.L - news) fell 2.4 percent, with dealers citing continuing regulatory probes which are forcing affected firms to set aside ever growing pots of cash to settle cases.

On Monday, HSBC said it was trawling through sales of investments to more than 200,000 customers amid fears of another mis-selling scandal. Royal Bank of Scotland (LSE: RBS.L - news) slipped 1.7 percent and traders pointed to Exane BNP Paribas' downgrade of the UK lender as an additional drag on sentiment.

Miners helped limit the index's losses, up 1.5 percent, bolstered by a private survey showing the services industry in top metals consumer China picked up in October in further evidence its economy has stabilised.

"We like the energy and materials sectors in the UK - on a general improvement in the global economy, also relative valuations," said James Butterfill, equity strategist at Coutts.

"Analysts are just starting to upgrade their earnings forecasts (for the two sectors). While they're still net quite bearish, typically when they start to upgrade that's quite a good time to get in."

The oil & gas sector is the second cheapest STOXX Europe 600 sector, trading on a 12-month forward price/earnings ratio of 9.9 times, while the basic resources sector trades on 12.8 times, according to Thomson Reuters Datastream. The STOXX Europe 600 trades on 13.4 times.

Despite Tuesday's weakness, analysts remained bullish on the FTSE 100, which hit a five-month high at 6,819 last week and is up nearly 12 percent from June.

The third-quarter earnings season has helped underpin the equity market rally, with half of European companies to have reported so far having beaten or met earnings expectations, Thomson Reuters Starmine data shows.

"Given increasing corporate earnings and a strengthening global and domestic economic recovery it is likely (equities) from here will be broadly supported... we would expect the FTSE to continue higher for a number of months," said Richard Bonnor-Moris, head of multi-asset solutions at Newscape Capital Group.

(Additional reporting by David Brett; editing by Patrick Graham (AMEX: GHM - news) /Ruth Pitchford)