FTSE 100 holds breath before budget, Thomas Cook dives

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* FTSE 100 up 0.3 pct

* UK budget announcement awaited at 1230 GMT

* Housebuilders watched for potential policy changes

* Thomas Cook (Frankfurt: A0MR3W - news) slides as UK margins shrink

By Helen Reid

LONDON, Nov 22 (Reuters) - Britain's top share index edged higher on Wednesday as cautious investors awaited finance minister Philip Hammond's budget announcement which could shake up housebuilders, banks and insurance stocks.

The FTSE 100 nudged 0.3 percent higher after a lacklustre start, with financials and materials stocks the biggest gainers as banking stocks recovered across Europe.

Hammond, who delivers the budget at 1230 GMT, will be walking a tightrope between managing weak public finances and offering some sweeteners to win back voters.

"Hammond's got a little bit of wiggle room," said Guy Ellison, head of UK equities at Investec Wealth. "But it's in his nature not to be too throw-away with his cash."

"He is under pressure to produce some rabbits out of the hat to please the populace at a difficult time for the Tory party, so I'm sure there will be at least one give-away somewhere," he added.

Housebuilders are likely to feature, Ellison said. Hammond has said he will seek to boost house-building.

Policies could include extending help to buy or encouraging housebuilders to use land banks in a more timely manner.

Chris Ellis Thomas, equity strategist at Liberum, said "Help to buy is one area where there could be a surprise announcement. If there was an extension that would be likely to move the market."

The housebuilding sector has been among the best-performing in the UK this year, up 9.4 percent.

Analysts also flagged a potential insurance premium tax announcement which could move insurers' shares.

In generally muted markets, Thomas Cook was the stand-out, diving 13 percent after results.

The mid-cap tour operator revealed shrinking UK margins after four consecutive years of profit growth, indicating competition in the sector is heating up.

"This is much worse than expected despite TCG flagging margin pressure through the year," said Barclays (LSE: BARC.L - news) analysts.

"The major issue is exposure to Spain (c. 44% of UK business) - going forward TCG needs to remix capacity away from Spain," they added.

The sharp drop in the share price, which also dragged down blue-chip tour operator TUI (LSE: 0NLA.L - news) , came after the stock's strong rally in the two previous sessions.

Financials were the biggest contributors to index gains with HSBC and Standard Chartered (BSE: 580001.BO - news) up 1.5 percent, tracking a Europe-wide recovery among banking stocks which had fallen in the previous session.

Elsewhere an upgrade to 'overweight' from JP Morgan sent Reckitt Benckiser (Xetra: A0M1W6 - news) shares up 2.3 percent.

Software (IOB: 0NJS.IL - news) firm Sage gained 2.1 percent after reporting a 10 percent rise in organic profit, delivering a "dancing set of final results nicely ahead of expectations", according to Stifel analysts.

Stronger gold prices, thanks to a weaker dollar, helped boost gold miners Fresnillo (Frankfurt: A0MVZE - news) and Randgold.

(Reporting by Helen Reid; Editing by Elaine Hardcastle)