* FTSE 100 down 0.4 percent; banks biggest fallers
* BP higher as investors eye 2011 dividends
* Banks fall, Compass drops after trading updates
By Simon Falush
LONDON, Sept 30 (Reuters) - Britain's FTSE 100 closed lower on Thursday as weaker banks outweighed gains from energy stocks on stronger crude prices and comments suggesting BP could resume paying a dividend in 2011.
The FTSE 100 closed 20.65 points, or 0.4 percent lower at 5,548.62. It gained 6.2 percent in September and 12.8 percent in the third quarter.
Sharp falls in U.S. weekly claims for jobless benefits and early signs of strength in September business activity helped to lift stocks in afternoon trade, but uncertainty over the outlook for banks and the wider economy saw it retreat just before trading closed.
"There's optimism out there and investors are happy to see modest improvement but we are going to see insipid reaction to positive data," David Buik, senior partner at BGC Partners, said.
Trade was also volatile as investors adjusted positions at the end of the quarter.
Banks took most points off the index, extending Wednesday's sharp losses.
Ireland's central bank has put a 34 billion-euro ($46.2 billion) price on bailing out Anglo Irish Bank under a worst-case scenario and said Allied Irish Banks needs to raise an additional 3 billion euros by the end of the year.
Barclays fell 1.9 percent while HSBC lost 0.6 percent.
But elsewhere among financials Man Group was the top gainer, up 2.8 percent, buoyed by a supportive note from UBS which reiterated its "buy" stance on the stock.
BP BONUS
BP gained 1.6 percent as the oil major's chief executive Bob Dudley told the BBC that the company wanted to resume paying a dividend in 2011.
BP and other energy firms like Royal Dutch Shell, up 0.3 percent, were also supported as oil prices rose around $1 to near $79 per barrel.
But overall investors were cautious and a wide range of shares were weaker. Supermarket Tesco and miner Xstrata were both down around 2 percent.
Moody's Investor Service cut Spain's credit ratings to Aa1 from AAA, with a stable outlook, saying it sees weak economic growth prospects for the euro zone's fourth-biggest economy.
"The Spanish downgrade, although expected, together with the concerns over the banking situation in Ireland means investors remain wary," Mic Mills, head of electronic dealing at ETX Capital, said.
Compass Group fell 3.8 percent after a "disappointing" in-line trading statement, said trader Ben Critchley at IG Index, although brokers remain generally positive about the catering group's longer-term outlook.
On the upside, Burberry climbed 2 percent after Bernstein issued a broadly positive note on the luxury goods sector.
Upbeat broker sentiment also helped Smiths Group, up 1.9 percent, with Morgan Stanley hiking its target price for the technology group following full-year results on Wednesday. (Additional reporting by Tricia Wright; Editing by Greg Mahlich)