Britain's FTSE inches higher, Ocado drops

* FTSE 100 up 0.3 pct at close

* Financials gain on hopes of interest rate rise

* Ocado slides as investors focus on rising costs

* Supermarkets edge up as Kantar data shows sales growth

* Ferguson gains on brokers' praise (Recasts, adds detail, updates with prices at close)

By Helen Reid and Kit Rees

LONDON, Sept 19 (Reuters) - British share indexes advanced on Tuesday as retail stocks gained and cyclical stocks also helped, with investors awaiting further signs of the direction of monetary policy.

Britain's FTSE 100 ended the session up 0.3 percent at 7,275.25 points after a volatile start to trading as investors hesitated ahead of the Fed's two-day meeting starting later in the day. European bourses were broadly flat.

The FTSE was boosted on Monday by Bank of England governor Mark Carney saying interest rates were likely to rise in the coming months.

"In our view the driving variable into the end of the year is likely to be the direction of bond yields," said equity strategists at JP Morgan.

They cut UK equities to underweight on Monday, highlighting a strong inverse correlation between the relative performance of the UK and the direction of bond yields.

Financials, which benefit when interest rates are raised, supported the index, with HSBC and Lloyds both up around 1 percent, but gains were muted overall.

Energy stocks added the most points to the index as oil prices held close to five-month highs.

Supermarkets Sainsbury's, Morrisons, Tesco (Swiss: TSCO.SW - news) and Marks & Spencer (Frankfurt: 534418 - news) , whose bricks-and-mortar business models have been squeezed by online delivery services like Ocado, were among top FTSE 100 gainers.

Sales data from Kantar showed inflation helped boost sales growth for the top supermarkets, with Tesco (Frankfurt: 852647 - news) coming out on top although its market share was squeezed.

Online grocer Ocado tumbled 2 percent, however, after its third-quarter results revealed rising short-term costs due to a ramp-up in capacity at its Andover distribution centre and investment in a new centre in Erith near London.

"Management have guided down full-year EBITDA expectations," said Bernstein retail analyst Bruno Monteyne. "This is in line with our view that the market under-estimates the margin impact of setting up the new facilities."

Construction and plumbing supplies distributor Ferguson rose 2.3 percent after Citi upgraded the stock to a "buy" and Barclays (LSE: BARC.L - news) reiterated its optimism on it.

Citi analysts said the shares were good value after recent weak performance, and flagged full-year results on Oct (Shenzhen: 000069.SZ - news) . 3 as a "key catalyst".

Barclays analysts said Ferguson could resist pressure on its business model from online alternatives.

"We see Ferguson as being able to match or beat Amazon on the range and availability of products expected by its professional plumber customer base as well as on delivery/collection options," they said in a note.

(Reporting by Helen Reid and Kit Rees; editing by Mark Heinrich)