JOHANNESBURG (Reuters) - South African banking stocks rallied on Thursday, following Wednesday's strong upward moves on U.S. markets, lifting the blue chip Top-40 index more than 2 percent in early trading.

The JSE banking index gained 4.95 percent by 0820 GMT, and the Top-40 index rose 1.78 percent to 25,598.94 points. Sanlam jumped 7.58 percent to 16.47 rand, while Nedbank leapt 7.35 percent to 97.80 rand.

"It's really a follow on from what we saw on the U.S. markets...We've seen quite a lot of switching coming out of the resource stocks and into the banking and financial stocks," Andrew Todd, a trader at BoE Private Clients, said.

"The oil price has also come down quite dramatically, so in terms of worldwide inflation and inflation locally, that also could be a positive factor."

U.S. stocks rallied more than 2 percent on Wednesday, powered by the best day for banks in 16 years as unexpectedly strong results from Wells Fargo & Co relieved worry about a credit crisis spiralling out of control.

Oil hit a second consecutive session of steep losses on Wednesday, its biggest two-day loss in percentage terms since January 2007.

"Our banks have been hit incredibly hard, they just need some kind of spin to spark off demand to start the recovery process, and that's exactly what it is," Tubby Goodwin, a trader at Investec Securities, said.

Investec Ltd rose 7.22 percent to 47.50 rand and South Africa's biggest retail bank Absa was 5.65 percent higher at 95.25 rand.