* Banks gain; Goldman upgrade lifts HSBC
* UK inflation steady at 1.8 percent
* British Land falls as company rebuffs takeover rumour
By Harpreet Bhal
LONDON, Aug 18 (Reuters) - Britain's top share index closed 0.9 percent higher on Tuesday, led by gains in banks and miners which recovered from losses in the previous session, while data showed inflation held steady in July.
The FTSE 100 index closed 40.77 points higher at 4,685.78, recovering from a 1.4 percent drop on Monday, its biggest one-day percentage loss since July 2.
The index has rebounded 35 percent since hitting an all-time low in March, which analysts say is partly driven by improving corporate results and efforts by the government to spur the economy.
"We are starting to see tangible signs that the aggressive monetary and fiscal stimulus policies are starting to work ... and the corporate results continue to be better than expected," said Henk Potts equity strategist at Barclays Stockbrokers.
British inflation unexpectedly held steady in July at 1.8 percent, but economists predict big falls in the annual rate this year and monetary policy to stay loose for some time.
Banks added the most points to the index, as appetite for risky assets intensified. HSBC climbed 2.8 percent as Goldman Sachs upped its rating for the lender to "buy" from "neutral" with an increased target price of 820 pence.
Goldman Sachs also provided a spur for Standard Chartered, which was up 2.1 percent, as the broker raised its target price.
Lloyds Banking Group and Royal Bank of Scotland put on 1.9 and 2.9 percent respectively, but Barclays bucked the trend to edge down 0.1 percent.
RBS is believed to be looking at following Barclays and Lloyds Banking Group and selling part of its asset management arm, the Daily Express reported.
Miners were largely in positive territory, recovering from Monday's sell-off. Xstrata, Kazakhmys, Eurasian Natural Resources and Fresnillo rose 0.4 to 2.4 percent.
Rio Tinto found favour, rising 1.7 percent, after the company agreed to sell its Alcan packaging unit for about $2 billion to Australia's Amcor, easing its debt burden.
Oil majors were mixed, as crude prices rose above $67 a barrel. BG Group, BP, Cairn Energy and Tullow Oil advanced between 0.5 and 2.5 percent, while Royal Dutch Shell fell 0.3 percent.
Among individual risers, oil services and engineering group AMEC rose 4.4 percent, the biggest gainer on the index, after Citigroup lifted the company's price target on an optimistic view on its margins.
InterContinental Hotels Group climbed 3.5 percent after Cazenove raised the company's rating to "outperform" from "in-line".
BRITISH LAND PRESSURED
On the downside, British Land fell 2.7 percent as investors took profits after a recent speculative run on the stock.
The company's chief executive quelled speculation the company was a takeover target, as it posted a smaller-than-expected 9 percent fall in first-quarter net asset value to 361 pence.
Peers Land Securities Group lost 0.4 percent, while Liberty International was flat.
In the United States, data showed group breaking for new U.S. homes fell unexpectedly in July, but single-family home construction in the same period rose for the fifth straight month, giving some support to hopes of an economic recovery (Editing by Jon Loades-Carter)