* Miners, oils fall along with commodity prices
* Defensives in demand as risk appetite reverses
* Banks rally; Standard Chartered boost by bid talk
By Jon Hopkins
LONDON, Oct 12 (Reuters) - Britain's leading share index edged lower on Tuesday with weakness in commodity issues countering strength in defensive issues as investors' risk appetite faded.
At the close, the FTSE 100 index was down 10.81 points, or 0.2 percent, at 5,661.59, having earlier touched its lowest level in a week below the 5,600 level.
Miners Xstrata, Kazakhmys, and Lonmin were among the top blue chip fallers, down 2.1 to 2.6 percent, as metal prices eased with a strengthening dollar on short-covering as investors awaited likely indications there will be fresh quantatitive easing from the U.S. Federal Reserve.
"The market remains nervous as likely quantitative easings, while providing a positive boost, will reinforce worries over the global recovery, raising demand concerns for commodities," said Mic Mills, head of electronic trading at ETX Capital.
The Fed said after its Sept 21 meeting -- for which it is set to release the minutes at 1800 GMT on Tuesday -- it was prepared to provide more support for the economy but expressed concern about low inflation.
U.S. blue chips were 0.2 percent lower ahead of the Federal Open Market Committee (FOMC) minutes release, also impacted by China's latest bid to cool down the world's second biggest economy.
The Chinese government raised bank reserve requirements by 50 basis points, the fourth hike this year, due to excessive lending, an official Chinese newspaper reported. The report confirmed a Reuters story on Monday.
Crude prices slipped for a second day on Tuesday as Saudi Arabia signalled OPEC would maintain current production levels at the group's meeting and as the dollar rallied.
Oil majors BP and Royal Dutch Shell both shed 0.7 percent.
Oil exploration stocks were dealt a sobering blow as mid cap Soco International plunged 18.8 percent on news it would abandon its Vietnamese appraisal well.
Blue chip Cairn Energy lost 2.7 percent.
SPECULATIVE STANDARD
Banks were among the top blue chips gainers led by Standard Chartered, up 2.1 percent, as traders cited talk that JPMorgan was interested in making a takeover approach.
JPMorgan and Standard Chartered both declined to comment.
Global banking heavyweight HSBC also provided support, up 0.2 percent, while Royal Bank of Scotland also gained 0.2 percent.
Defensive issues were the main FTSE 100 gainers with drinks group Diageo adding 1 percent, ahead of a trading update due later in the week, while drugmaker AstraZeneca gained 0.8 percent, and British American Tobacco took on 0.9 percent.
Utilities were higher, with water company Severn Trent ahead 1.0 percent and mid-cap peer Pennon up 2.1 percent as HSBC raised its ratings for both firms, saying UK water offered a stable outlook with yield visibility to 2015.
However, United Utilities slipped 0.1 percent as HSBC cut its rating to "neutral" from "overweight".
British inflation held well above its target in September, unchanged from August, as separate surveys showed retail sales growth slowing and house prices falling fast, highlighting the opposing forces facing the Bank of England.
(Editing by Karen Foster)