Banks drag FTSE lower on euro zone debt worries

* FTSE 100 down 0.6 percent

* Banks fall back after initial gains on Ireland bailout

* ICAP knocked by broker downgrade

By Tricia Wright

LONDON, Nov 22 (Reuters) - Britain's top share index was lower by midday on Monday, as concerns over euro zone debt weighed on the banking sector after Ireland's bailout, while defensive stocks saw gains.

By 1220 GMT, the FTSE 100 <.FTSE> index was down 36.13 points, or 0.6 percent, at 5,696.70, retreating after hitting a peak of 5,783.14 earlier in the session after Ireland agreed to a bailout by EU partners and the International Monetary Fund.

The European Union and the IMF agreed on Sunday to help bail out Ireland with loans expected to total 80-90 billion euros to resolve its banking and budget crisis. [ID:nLDE6AL00M]

"While (the deal) probably solves (Ireland's) individual short-term concerns, it certainly doesn't solve the overall outlook in terms of risk of contagion and uncertainty for the wider euro area," said Henk Potts, equity strategist at Barclays Wealth.

Banks <.FTNMX8350>, which rose earlier in the session, went into reverse as investor caution over the European debt situation undermined sentiment.

Royal Bank of Scotland dropped 3.3 percent, while Lloyds Banking Group was 2.4 percent lower.

Defensive stocks came into favour as investors switched out of sectors perceived as more risky.

Utility Scottish & Southern Energy climbing 1.2 percent.

"It seems to me that what little money is going into equities this morning is going towards utility stocks and certainly out of the banking sector. I don't think the problems with the EU area are quite over yet," said Manoj Ladwa, senior trader at ETX Capital.

Integrated oil stocks, the top blue chip performers earlier on Monday, fell back, led by BG Group , off 0.9 percent.

Mining stocks were also on the back foot, with Eurasian Natural Resources and Rio Tinto shedding 0.7 percent and 0.8 percent respectively.

Interdealer broker ICAP dropped 1.9 percent as broker Execution Noble cut its rating on the stock to a "hold" from a "buy". [ID:nLDE6AL0F1]

Invensys was also hit by a broker downgrade, losing 0.8 percent, with traders saying Bank of America Merrill Lynch had cut its stance to "neutral" from "buy".

U.S. stock index futures pointed to a flat to higher opening on Wall Street on Monday, ahead of October's Chicago Fed index, due at 1330 GMT. [ID:nLDE6AL0H0] (Editing by Jane Merriman)