FTSE dips as commodities drop offsets banks rally

* FTSE falls 0.2 pct as commodities weigh

* Banks rise, adding to previous day's rally

* Investors eye Citigroup results

By Rebekah Curtis

LONDON, July 18 (Reuters) - British blue-chip stocks slipped on Friday, as commodities reversed the previous day's hefty gains, offsetting a rally in banks.

By 0758 GMT the FTSE 100 .FTSE was down 0.2 percent at 5,277.6. The index closed up 2.6 percent on Thursday, when a surge in battered banks was fuelled largely by better-than-expected results from U.S. bank JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz).

Commodities shares were the biggest losers. Oil major BP (BP.L: Quote, Profile, Research, Stock Buzz) dropped 0.3 percent and Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) fell 0.5 percent, as crude prices traded well down from recent highs.

Among miners, Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz) shed 3.5 percent, while BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) both fell 2.5 percent.

Investors are looking to second-quarter results from Citigroup (C.N: Quote, Profile, Research, Stock Buzz) later in the day for further clues on the health of U.S. banks.

U.S stocks leapt on Thursday, but pessimism set in after the closing bell as Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) posted a much larger than expected $4.89 billion quarterly loss after writedowns. [ID:nN17199614]

Google (GOOG.O: Quote, Profile, Research, Stock Buzz) and Microsoft (MSFT.O: Quote, Profile, Research, Stock Buzz) also missed Wall Street's estimates.

"People are still concerned about the outlook for U.S. growth," said Roger Cursley, a strategist at Investec.

"That was a decent rally," he said of Thursday's surge in UK stocks. "(But) until the oil price cracks ... towards $100, I don't think we going to see a sustained rally in this market."

"Short term we're going to be treading water," he added.

Meanwhile, mortgage giant Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) is considering raising capital by selling as much as $10 billion in new shares to investors, The Wall Street Journal reported, citing people familiar with the matter.  Continued...