* FTSE 100 up 0.8 percent
* Miners rally as gold above $1,000
* Investors welcome return of M&A activity
By Tricia Wright
LONDON, Sept 8 (Reuters) - Britain's leading share index rose on Tuesday touching its highest level since last October, bolstered by miners as gold rose above $1,000 an ounce, and with sentiment lifted as takeover activity came back into play.
By 0810 GMT, the FTSE 100 was up 38.08 points, or 0.8 percent, at 4,971.26, after reaching an 11-month high of 4,971.99.
Shares built on Monday's advance, when the FTSE closed at 4,933.18, spurred by strong gains in confectionery group Cadbury which rejected a surprise 10.2 billion pound bid from North America's biggest food group Kraft Foods.
"There's a sea-swell of bid expectation following on from Cadbury, and Cadbury itself is obviously giving a bit of a plus there," said Howard Wheeldon, strategist at BGC Partners.
However he sounded a note of caution on the outlook for the equity market.
"We had a mini correction last week. That's not the end of it ... there's still a reality check to come," he said.
Cadbury rose 2.1 percent amid hopes Kraft might have to raise its offer by up to 40 percent after shares in the world's No.2 candy and chocolate maker increased by almost half on Monday on news of the approach.
Cazenove analysts said Nestle might make a counterbid for Cadbury, perhaps in a joint approach with U.S. chocolate group Hershey Co. Nestle CEO Paul Bulcke declined to comment directly but said the company had no major acquisitions planned though was always open to opportunities.
Miners added the most points to the index, enjoying a rally against a backdrop of rising metals prices, with gold jumping through the psychological $1,000 an ounce level to its highest level since February, boosted by a weak dollar and investors looking for a hedge against inflation.
Gold miner Randgold Resources led the sector higher, up 2.2 percent, while Kazakhmys, Rio Tinto, Vedanta Resources and Lonmin rose 1.4-2 percent.
Strength was also seen among energy stocks, as crude rose towards $69 a barrel, underpinned by comments by delegates from an OPEC meeting starting on Wednesday, which analysts believe may see more rhetoric on compliance but no change in output targets.
Heavyweights BG Group and BP put on 0.8 percent and 0.1 percent, respectively.
Banks pushed higher as investors looked to riskier assets, with Barclays, Lloyds Banking Group and Royal Bank of Scotland up 0.1-2.5 percent.
It was a mixed picture among life insurers. Friends Provident and Standard Life added 0.8 percent and 0.3 percent respectively, though Aviva shed 0.7 percent.
Selected defensive stocks were out of favour, with cigarette maker British American Tobacco off 0.2 percent and spirits group Diageo down 0.1 percent.
On the economic front, a survey by the British Retail Consortium showed UK retail sales fell on the year last month for the first time since May as cost-conscious consumers refrained from splashing out on non-essential items.
UK July manufacturing and industrial output figures are due at 0830 GMT. Manufacturing output is seen up 0.3 percent month-on-month, bringing the annual decline down to 11.10 percent from -11.70 percent in June.
The wider measure of industrial output is seen up 0.2 percent month-on-month, taking the annual decline to 10.10 percent from -11.10 percent in June. (Editing by Jon Loades-Carter)