RPT-Engineers halt FTSE rally on Japan disruption worries

(repeats to fix spelling error in headline)

* FTSE down 0.1 percent

* JMAT knocked by Japan quake disruption

* Banks gain, brokers see upside to earnings

By David Brett

LONDON, March 22 (Reuters) - Engineers and firms with exposure to Japan's car manufacturing sector dragged Britain's top shares lower around midday on Tuesday, offsetting gains in energy stocks and banks.

Companies which make parts for cars, and those which sell them, suffered, with retailer Inchcape off 4.9 percent and Johnson Matthey which makes catalytic converters, falling 2.9 percent.

Toyota said that all 12 of its Japanese plants will stay closed until at least Saturday.

"The auto industry lost 65 percent of car production in the last two weeks," Atif Latif, director of trading at Guardian stockbrokers said.

By 1142 GMT, the FTSE 100 <.FTSE> was down 5.42 points, or 0.1 percent at 5,780.67, having closed higher for a third straight session on Monday. The index is down around 3.5 percent in March.

Engineers, which have echoed investor sentiment towards the outlook for the global economy, continued their choppy trade of the last few days.

GKN was 3.1 percent lower. The firm was linked to a potential bid for French aerospace equipment maker Latecoere , according to a report in a French newspaper. [ID:nLDE72L0U2]

Ad group WPP shed 1.2 percent as Exane BNP Paribas cut its rating to "neutral".

Travel firm TUI Travel shed 2 percent after the postponement of a decision to float Hapag-Lloyd AG [HPLG.UL], the container shipping group part-owned by TUI AG . Proceeds from the float were to help expand TUI's tourism business. [ID:nN2184296]

BANKS GAIN

JP Morgan was upbeat on investment banks, saying Barclays , up 0.9 percent, was one of its preferred plays, adding it expects the stock to trade between 290 pence and 340 pence,

"Due to limited capital and earnings at risk from Japan, the recent fall in the prices of these stocks is an excellent opportunity to buy equity gearing through investment banks."

Royal Bank of Scotland climbed 1.7 percent.

Philip Isherwood, equity strategist at Evolution securities said European and UK earnings strength remains intact. He said financials were among a number of sectors including basic materials, industrials and technology, where earnings are all still below long-term trend and are all strongly rising.

"The evidence of earnings failure is not apparent in the key parts of the market that have been driving the earnings recovery," he said.

Elsewhere, Cairn Energy added 1.6 percent as it raised expectations of Indian approval for the long-delayed sale of a stake in its Indian business to Vedanta Resources , as the UK oil explorer posted a return to profit in 2010.

Essar Energy rebounded 1.9 percent after sharp falls post results on Monday.

Integrated oil <.FTNMX0530> were the top performing sector as oil remained near multi-year highs as Western warplanes continued to hit targets in Libya. [ID:nLDE72H00G]

Accountancy software firm Sage climbed 1 percent as JP Morgan argued the sector was not at risk of supply chain disruption from the earthquake in Japan and share price reactions looked overdone.

Meanwhile, technical analysts warned the FTSE's recent spike may not have too much further to go.

Enis Mehmet, an analyst at Autochartist, said short-term investors might focus on the range of 6,045 to 5,505, which creates a potential retracement target zone at 5,775 to 5,839.

(Editing by Elaine Hardcastle)