June 5 (Bloomberg) -- U.K. stocks rose as mining companies rallied after Rio Tinto Group scrapped an investment from Aluminum Corp. of China and Gordon Brown shuffled his Cabinet to stave off a challenge to his position as prime minister.

Rio Tinto, the world’s third-biggest mining company, soared 10 percent while larger rival BHP Billiton Ltd. gained 6.8 percent as Rio announced plans to raise $21 billion from a share sale and an iron ore venture with BHP. BG Group Plc rose 3.5 percent after Brazil’s Petroleo Brasileiro SA said a new well reinforced hopes its Tupi discovery holds oil and natural gas.

The FTSE 100 Index increased 51.62, or 1.2 percent, to 4,438.56, as banks and insurers also climbed. Stocks extended gains after a government report showed the U.S. lost fewer jobs in May than forecast. The FTSE All-Share Index rose 1.2 percent, while Ireland’s ISEQ Index advanced 1.8 percent.

The FTSE 100 has added 0.5 percent this week, extending a 26 percent rally since this year’s low in March amid optimism the deepest recession in half a century is starting to abate.

“The mining sector is clearly helping the FTSE,” said Robert Talbut, who helps manage $31 billion as chief investment officer at Royal London Asset Management. “We are in a rehabilitation phase of the economy and investors are prepared to take on more risk. I don’t see what is happening in the government as being sufficiently destabilizing for the fundamentals of financial markets.”

Brown’s Cabinet reorganization aims to lock in the support of lawmakers in the ruling Labour Party after at least four Cabinet ministers walked out of his government, including Pensions Secretary James Purnell, who called for his resignation.

Rio Tinto Gains

Rio Tinto jumped 10 percent to 3,001 pence. The mining company is selling the new shares at 1,400 pence each, raising $15.2 billion, to reduce $38.9 billion in debt without selling bonds and stakes in its largest mines to Chinalco, defusing a backlash from shareholders and politicians.

BHP, which abandoned a hostile bid for Rio because of the mining company’s debt levels, rose 6.8 percent to 1,555 pence. BHP’s ratings were affirmed by Moody’s Investors Service today, with a “stable” outlook after the company established the joint venture with Rio.

BG Group added 3.5 percent to 1,162 pence. Petrobras, Brazil’s state-controlled oil company, said a new well drilled in the offshore Santos Basin “reinforces expectations” its Tupi discovery holds 5 billion to 8 billion barrels of oil and natural gas. BG Group has a 25 percent stake in the BM-S-11 block.

The following stocks also gained or fell in the U.K. and Irish markets. Stock symbols are in parentheses.

Aer Lingus Group Plc (AERL ID) fell 4 euro cents, or 5.8 percent, to 65 cents in Dublin trading. Ireland’s second-biggest airline told shareholders at its annual meeting that it faces the “most difficult period” in its history and it can’t accurately forecast demand for the remainder of 2009 and beyond.

Dragon Oil Plc (DGO LN) fell 27.5 pence, or 6.8 percent, to 375 after the shares surged 19 percent yesterday. Emirates National Oil Co. today said it has held talks with the London- listed explorer in Turkmenistan and may make an offer. A bid would be at “a modest premium” to Dragon’s closing share price on June 3, Emirates said.

Fuller, Smith & Turner Plc (FSTA LN) rallied 21.5 pence, or 4.3 percent, to 517.5. The largest pub owner in London’s financial district said full-year sales increased 3 percent. The company reported a 53 percent drop in annual net income after writing down the value of its properties.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

Last Updated: June 5, 2009 12:28 EDT