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* FTSE 100 up 0.2 percent, touches 4-1/2 year high
* Index overbought on 7-day RSI
* Correction or consolidation could precede further gains
By Toni Vorobyova
LONDON, Jan 21 (Reuters) - Britain's FTSE 100 nudged fresh 4-1/2 year peaks on Monday, with appetite boosted by signs of progress on U.S. budget talks, but the scale of the recent rally prompted chart followers to warn of a possible pause.
U.S. Republican leaders signalled they would allow the government to raise the debt ceiling and borrow enough money to prevent a government default in the next three months without demanding immediate spending cuts from President Barack Obama.
The news, late on Friday, helped top U.S. stock indexes close at five-year highs and filtered through into stronger markets across Europe. Britain, with its strong trade ties to the United States and a heavy dose of internationally-focused companies among its blue chips, was a key beneficiary.
The FTSE 100 was up 12.31 points, or 0.2 percent, at 6,166.72 by 1144 GMT, after earlier climbing to 6,180.27 - a level last seen in mid-2008.
The UK blue chip index is up 4.5 percent so far in January, on track for its best monthly showing in half a year.
But the strong gains have taken the FTSE 100 into overbought territory on the 7-day relative strength index (RSI), raising the spectre of a near-term correction or at least consolidation.
"We keep grinding higher ... If you look at stochastics and RSI, they are massively overbought so I am envisaging a correction in the fairly near future," said Jack Pollard, analyst at Sucden Financial.
"If we saw a correction to around the 5,977 area, it wouldn't be a massive concern. If we then managed to hold that, I think people will start loading up on longs and we could move higher again into the end of the first quarter."
Traditional "risk-on" sectors led the way on Monday with miners up 0.5 percent.
Financials added their weight to gains too, with insurers bolstered by a 5.3 percent rally in Admiral Group after Goldman Sachs upgraded the firm to "buy" and added it to its conviction list.
Exporters also drew some strength from weakness in sterling, which dropped to 10-month lows against the euro and 9-week lows versus the dollar. That could make Britain's exports more attractive and increase the value in pounds of companies' profits earned abroad.
"The FTSE is an international market. The story of the last couple of weeks has been a bit of scepticism on sterling so you would expect share prices on overseas earners to offset any weakness in the currency," said Ian Richards, strategist at Exane BNP Paribas.
"The heavy (FTSE) bias in financials and commodity related plays looks pretty conducive to the kind of environment that we see in the first half of this year." (Reporting by Toni Vorobyova; Editing by Ruth Pitchford)