The BSE Sensex climbed 0.6 percent on Friday and helped post its first weekly rise in three, with banks leading the rebound as investors picked bargains after last month's fall.

Gains in global stocks after the U.S. Labor Department said initial claims for state unemployment benefit had dropped to its lowest level since early January also underpinned the market.

Tata Steel, the world's No. 8 steelmaker, firmed 3.1 percent to 499.70 rupees, after steel sales at its Indian operations rose an annual 38 percent in October.

Banks were bolstered after Standard & Poor's said on Thursday they would gain more than they would lose from tighter loan provisioning requirements.

Top lender State Bank of India rose 3.1 percent, its biggest rise in three weeks, to 2,204.20 rupees and while rival ICICI Bank added 0.5 percent to 848.75 rupees.

India's central bank had said on Oct. 27 banks must increase the minimum provision ratio for bad debts to 70 percent by September 2010.

State Bank and ICICI are still down 4.4 percent and 4.7 percent since Oct. 26.

S&P said the changes would boost banks' provisioning cushions and bring coverage ratios in line with their major Asian peers.

"I think they (banks) are just catching up after lagging behind for a while. The pattern these days is when people find a laggard, people want to enter it at attractive levels," said Rakesh Rawal, head of private wealth management at Anand Rathi.

"We have a positive long-term outlook for broader markets, and banks are likely to be amongst the major gainers," he said.

The 30-share BSE index closed up 0.59 percent, or 94.38 points, at 16,158.28, taking gains in the week to 1.6 percent. Nineteen of its components gained.

The benchmark has risen 4.9 percent in the past three days, after sliding 8.4 percent over six sessions.

"Volatility will continue in the near term. Global cues are also not very clear," Rawal said.

The index is up around 67 percent from the end of 2008, with foreign funds moving more than $14 billion into Indian equities this year.

Energy giant Reliance Industries closed 0.9 percent higher at 1,956.75 rupees, continuing its recovery. The stock fell abut 20 percent in 10 sessions from Oct. 20, hitting a 3-½ month low on Tuesday, but has since risen more than 7 percent.

"Although the next two months are likely to be volatile, for investors with a 12 month or longer-term view, the stock is attractively priced," Neil Beveridge and Angus Chan, analysts with Sanford C. Bernstein, which has an 'outperform' rating on the stock, said in a note.

The sector index for public sector companies rose 3.9 percent, after the government on Thursday mandated more sales of shares by state firms and changed the rules on how it can use the proceeds, as it seeks to boost revenues and rein in a widening budget deficit.

State-run NMDC hit its upper limit of 10 percent while Steel Authority of India and Shipping Corp of India rose 1.3 percent and 2.5 percent respectively.

Engineering and construction firm Larsen & Toubro rose 2.2 percent to 1,575.70 rupees, after 4.2 million shares changed hands in a block deal at 1,566.30 rupees.

In the broader market, gainers outpaced losers in the ratio of 1.5:1 on relatively better volume of 421 million shares.

The 50-share NSE index closed 0.6 percent higher at 4,796.15.

STOCKS THAT MOVED

* Tata Chemicals rose 5.3 percent to 278.15 rupees, after a senior company official said the chemical maker expects its fertiliser plant in the northern state of Uttar Pradesh to start commercial production by mid 2010.

* Trucks and bus maker Ashok Leyland extended gains

and rose 3.9 percent to 51.20 rupees after it said earlier this

week its October sales rose 57 percent.

MAIN TOP 3 BY VOLUME

* Suzlon Energy on 23.7 million shares

* IFCI on 17.9 million shares

* Indiabulls Power on 15.5 million shares

(Editing by Ranjit Gangadharan)