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FTSE 100 up 2.6%, FTSE 250 adds 3.1%

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Sterling rises, 10-year bond yields decline

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Greggs same-store sales rise 9.7%

(Updates to close)

By Johann M Cherian and Devik Jain

Oct 4 (Reuters) -

The UK's main stock indexes rallied sharply on Tuesday, extending gains for a third straight session as the fall in global bond yields spurred appetite for riskier equities, with investors scooping up beaten down shares of financials, retailers and commodity companies.

The blue-chip FTSE 100 .FTSE ended up 2.6%, at its highest level since Sept. 23 and logging its best daily performance since June 24.

The FTSE 250 midcap index .FTMC closed up 3.1%, at its highest level in a week and posting its best one-day percentage gain since March 16.

Banks .FTNMX301010 gained 4% led by a 4.5% jump in shares of HSBC Holdings HSBA.L as the Asia-focused lender was considering a sale of its multi-billion dollar business in Canada to beef up returns as demanded by its largest shareholder.

"There is a feeling that stocks are starting to look very cheap, luring some opportunistic investors back to the market. However it is likely that there will be a bumpy ride ahead and by no means can we be sure that the selling is over," said Victoria Scholar, head of investment at Interactive Investor.

"It appears as though a glimmer of optimism has been restored, reflected in this week's revival of the pound. But U.S. dollar strength, fiscal uncertainty, inflation and fears of a recession continue to be major headwinds for European equity markets."

The pound GBP=D3 has risen for the sixth consecutive session after the Bank of England (BoE) last week restarted its bond-buying programme following a dramatic plunge in long-dated gilts, and as investors welcomed the British government's U-turn on some tax cuts.

Meanwhile, global stocks and bond prices rallied on Tuesday on the back of a weaker read of U.S. manufacturing data for September and a retreat in eye-wateringly high European energy prices.

A smaller rate rise by the Australian central bank helped push down borrowing costs around the world, pumping investor risk appetite.

Risky assets have taken a hit this year as central banks globally undertake monetary tightening to tame surging inflation, at the risk of causing a recession.

Among single stocks, Legal & General Group LGEN.L jumped 5.9% after the insurer said it had not been a forced seller of gilts, quelling investor unease after sudden yield spikes sparked a dash for cash by some pension fund clients.

Greggs GRG.L surged 10.3% after the baker and fast food chain said its same store sales rose 9.7% year-on year in its fiscal third quarter, despite a worsening cost of living squeeze.

BP BP.L and Shell SHEL.L rose 2.7% and 1.7% respectively and miners .FTNMX551020 jumped 3.3%, supported by higher crude and copper prices.

Reporting by Johann M Cherian and Devik Jain in Bengaluru; editing by Uttaresh.V and Ken Ferris