FTSE falls as banks wane on Europe woe, HSBC update

* FTSE down 0.6 percent

* HSBC slips on cost concerns, falling profit

* Near-term outlook for equities choppy, JPMorgan

By David Brett

LONDON, May 9 (Reuters) - Britain's FTSE 100 was lower at midday on Monday, with HSBC among the leading decliners after reporting a drop in profits ahead of a strategic update on later this week.

Europe's biggest bank and peer Barclays added to the strain after giving up their fight over compensating customers wrongly sold insurance and being forced to take a combined $2 billion hit in the latest blow to the sector.

By 1051 GMT, the FTSE 100 <.FTSE> fell 36.64 points, or 0.6 percent, at 5,940.13.

The index lost some of Friday's 1.0 percent gains, when investors were buoyed by a U.S. jobs report, which beat on headline job creation numbers but fell short of expectations on unemployment figures. Europe's debt problems also dampened risk appetite.

Banks were weak as investors digested HSBC's latest update.

Europe's biggest bank fell 1.6 percent after it reported a 14 percent fall in first-quarter profits year-on-year, as rising costs offset lower bad debts. [ID:nLDE7480EF]

Investors are now focusing on the company's strategic update due later in the week for clues on how the bank intends to combat cost pressures.

Barclays shed 1.4 percent after it said it was to take a 1 billion pound ($1.64 billion) provision on the insurance mis-selling.

Eurozone debt worries were also a factor as the UK market retreated. Greek government bond yields jumped on deepening concerns over the country's debt crisis, following a meeting on Friday of top euro zone finance ministers.

"The market is looking towards the euro zone, and Greece in particular, given the murmurs emanating about the potential need for a second bailout or even an exit from the Euro (denied on Saturday by Greek Prime Minister George Papandreou)," a London-based trade said.

COMMODS MIXED

Energy <.FTNMX0530> and mining <.FTNMX1770> shares were mixed as commodities staged a mini recovery following last week's sell-off, as global growth concerns lingered.

JPMorgan asset management, in its weekly global asset strategy note, said its latest quantitative model output reaffirms a positive approach towards risk in the medium term, with equities faring well against bonds and cash.

But with global growth indicators such as PMI peaking, surging inflation and slowing earnings momentum, the equity outlook near-term looked capricious.

"While markets look vulnerable in the short term, the conditions for medium-term outperformance of equities remain in place. We stick with our strategy, but at reduced levels of portfolio risk," JPMorgan Asset Management said.

Miner Lonmin rose 1.5 percent after results and an update, with Evolution Securities lifting its rating on the shares to "add". [ID:nLDE7480US]

Centrica , meanwhile, was the biggest faller, off 4.2 percent at a nine-month low after the utility warned that rising taxes on North Sea oil and gas production would erode profit growth this year and cause it to scale back investments.

UK real estate investment firms Land Securities and British Land fell by up to 1.8 percent, as UBS downgraded its rating on the pair to "neutral" from "buy" on valuation grounds, in a note on London-focused real estate firms.

On the upside, software firms were chased higher.

Autonomy rose 3.1 percent after Numis upgraded its rating on the search software company to "add", saying it is well positioned to deliver upgrades on a 12-month view.

Sage Group rose 1.7 percent, while FTSE 250 <.FTSE> software company Misys added 4.1 percent as Credit Suisse reinstated its "outperform" rating on the firm.

Inmarsat was the top FTSE 100 performer, up 4.4 percent, after the satellite operator reported a 23 percent rise in first-quarter earnings, which while broadly in line with expectations prompted Investec to put its price target and "hold" rating under review after recent share price weakness. (Additional reporting by Trica Wright; Editing by Mike Nesbit)