FTSE rebounds off 5-1/2 month lows; airlines rally

By Sudip Kar-Gupta and Alistair Smout

LONDON (Reuters) - Britain's top equity index bounced back from five-and-a-half month lows on Wednesday, lifted by airline stocks that were boosted by lower oil prices and a recommendation for a new runway at London's Heathrow airport.

The blue-chip FTSE 100 index (.FTSE) was up by 80.88 points, or 1.2 percent, at 6,601.86 points by the close. It was still about 7 percent below a record high of 7,122.74 points reached in late April.

Airlines were among the best performers. EasyJet (EZJ.L) British Airways' owner International Consolidated Airlines Group (IAG) (ICAG.L) and travel group TUI (TUIT.L) advanced 2.4-3 percent.

Airline shares were boosted as oil prices fell on the back of record new production levels and after a government-appointed commission said Britain should build a third runway at Heathrow.

"Improving capacity at Heathrow will definitely help those stocks, while the lower oil price is giving them a further lift," said Securequity sales trader Jawaid Afsar, who added he had recently bought shares in easyJet and IAG.

London and other European stock markets got a further boost after the Financial Times reported Greek Prime Minister Alexis Tsipras had written to international creditors saying Greece was prepared to accept a bailout offer published on June 28, provided several conditions were changed.

However, Germany said it was sceptical about restarting negotiations while a referendum about the international lenders conditions was still scheduled for Sunday, and stocks pared gains after Tsipras reiterated his position that Greece should vote to reject the bailout.

Despite the FTSE's rebound, which followed a 2 percent drop on Tuesday that sent the FTSE down to its lowest level since mid-January, many traders remained cautious given the uncertainty over Greece.

The fate of Greece's membership in the 19-nation euro currency bloc remains in the balance ahead of a referendum on Sunday when Greek citizens will vote on whether to accept the austerity terms of continued international aid.

"I have been looking to sell out on any rallies for a profit given that the Greek situation remains volatile," said Beaufort Securities' sales trader Basil Petrides.

Mid-cap outsourcer Serco (SRP.L) rallied 6.5 percent after it reaffirmed its profit and sales forecasts for the current year as it continues to overcome a disastrous period of contract problems and scandals.

"With Serco's shares shedding a whopping 75 percent since July 2013 on the back of its government overcharging scandal, it seems the company may be back on track," said Brenda Kelly, head analyst at London Capital Group.

Among stocks losing ground, Speedy Hire (SDY.L) -- which is also outside the FTSE 100 index -- slumped 30 percent after issuing a profit warning and announcing the departure of its chief executive.

(Editing by Alison Williams)