Tullow leads FTSE higher, but caution ahead of ECB

* FTSE 100 up 0.2 pct

* Tullow Oil (LSE: TLW.L - news) boosted by UBS (Xetra: UB0BL6 - news) upgrade

* Kingfisher (LSE: KGF.L - news) up, in exclusive talks to buy French peer

By Tricia Wright

LONDON, April 3 (Reuters) - British shares inched higher on Thursday, led by oil explorer Tullow Oil on the back of an analyst upgrade, although market gains were muted as investors waited to see if the European Central Bank would act in the face of deflation fears.

Tullow Oil rose 3.9 percent, with traders attributing the move to UBS's decision to upgrade its rating on the stock to "buy" from "neutral".

"The investment case for Tullow shares has clearly changed. Less evident for the time being is the high impact offshore explorer. In its place is a different animal, with greater leverage to development risk but with significant onshore exploration upside," UBS analysts wrote in a research note.

Trading volumes in the stock stood at a third of the stock's three-month daily average in just over an hour of trading - above volumes for the FTSE 100 which only stand at a 10th of its average.

Tullow's shares have approximately halved in the past two years, hit by exploration disappointment.

Adding to the upbeat mood were further signs of a rebound in corporate activity. Kingfisher, Europe's No. 1 home improvement retailer, has launched a 275 million euros ($378.6 million) takeover bid for France's Mr Bricolage, moving to strengthen its position in its most profitable market.

Its shares rose 1.1 percent in early trade. Analysts at Oriel Securities said the acquisition made strategic sense, and that the deal should be very modestly EPS enhancing in FY16.

The FTSE 100 was up 14.82 points, or 0.2 percent, at 6,673.86 points by 0814 GMT, having inched 0.1 percent higher in the previous session, helped by encouraging news on the U.S. labour market ahead of Friday's U.S. jobs report.

Euro zone monetary policy will fall under the spotlight as the European Central Bank holds its regular meeting.

While the consensus view is for the ECB to keep interest rates steady and offer no new aid to the euro zone's fragile recovery in spite of deflation concerns, analysts reckoned there was still room for a market pull-back if the ECB does not act.

"I think actually we need either a rate cut or a specific liquidity measure today - I think if we just get talk, there will be a slight negative response," said Peel Hunt equity strategist Ian Williams.

But as the second-quarter gets under way, investors are broadly bullish about equity markets, pointing largely to signs that growth in the United States is staying on track.

Technical analysts reckoned the UK benchmark could move back up towards the top end of the range it has been stuck in since late October, between about 6,400 and 6,800.

Charles Stanley (LSE: CAY.L - news) analyst Bill McNamara says that despite a mere 0.1 percent rise on Wednesday, the chart is still pointing to further gains. The index has risen nearly 3 percent since late March lows. ($1 = 0.7263 Euros) (Additional reporting by Sudip Kar-Gupta; Editing by Alison Williams)