By Sudip Kar-Gupta
LONDON (Reuters) - British shares turned higher on Tuesday, buoyed by a drop in inflation to a 12-year low that further eased a squeeze on consumers and raised prospects of interest rates staying lower for longer.
The blue-chip FTSE 100 index (FTSE), which had fallen to two-month lows at the start of the trading session, rose following the November inflation data and traded 0.6 percent higher at 6,219.41 points going into the middle of the session.
"The inflation data was taken well because it means interest rates may be on hold for longer now," said Securequity sales trader Jawaid Afsar.
Afsar said he would look to buy up stocks at current levels, given the sharp pullback on the FTSE over the last month.
His preferred stocks included energy group BG (L:BG), British American Tobacco (L:BATS) and healthcare group GlaxoSmithKline (L:GSK) - viewed as defensive plays at times of market uncertainty due to their chunky dividend payouts.
OIL PRICE FALLS FURTHER
Bank stocks also outperformed, with the FTSE 350 Banking Index (FTNMX8350) rising 0.7 percent after the Bank of England said Britain's biggest banks would be able to withstand a sharp fall in house prices.
Some traders said an ongoing slump in the oil price would continue to cause volatility in stock markets.
Oil fell to just above $59 a barrel for the first time since May 2009 on Tuesday, extending a six-month selloff as slowing Chinese factory activity and weakening emerging-market currencies added to concerns about demand.
The flash HSBC/Markit China manufacturing purchasing managers' index fell to 49.5 in December, lower than forecast by analysts and below November's final reading of 50.0.
"Volatility is likely to continue in the short term as the full effects of a lower oil price ripple through financial markets," said Laith Khalaf, a senior analyst at Hargreaves Lansdown.
(additional reporting by Atul Prakash; Editing by Larry King and John Stonestreet)