FTSE gains 2.5 per cent as sentiment lifts banks

Britain's top share index closed 2.5 per cent higher yesterday, led by rebounding banks boosted by improving global sentiment and M&A activity in the troubled sector.

The FTSE 100 was up 135.4 points at 5,506.6. The UK benchmark gained 0.6 per cent for the week but is still down 15 per cent for the year. Banks were the biggest gainers, rebounding after recent losses as Barclays, Royal Bank of Scotland, Lloyds TSB, HBOS, HSBC and Standard Chartered gained between 2.6 and seven per cent.

Banks were aided by generally improved sentiment after Federal Reserve Chairman Ben Bernanke said the recent decline in commodity prices and the stabilisation of the dollar were encouraging.

Financials were also supported by news that State-run Korea Development Bank said Lehman Brothers was one of its options for acquisitions, reviving expectations that the US investment bank may still bring in a large investor.

Data showed the UK economy unexpectedly ground to a halt in the second quarter, pushing trade-weighted sterling to its lowest in eleven-and-a-half years and briefly knocking a few points off the FTSE 100.

But the index soon resumed an upward trajectory as optimism on global growth outweighed concerns on the domestic economy.

"Remarkably, given the bad news that's out there, the index is up as the (Lehman) takeover story has driven bank stocks higher, which has pushed up the index," said Peter Dixon, UK economist at Commerzbank. "But you have to ask, is it sustainable? I don't think so."

Traders said the rise in financial stocks was also driven by investors covering short positions ahead of the long weekend holiday.

The financial sector was helped by the announcement from Benfield and Aon Corp., one of the world's largest insurance brokers, that the US firm had made a recommended cash offer for the UK-listed broker.

Mid-cap Benfield leapt nearly 30 per cent.

Bradford & Bingley advanced 3.9 per cent after the mid-cap mortgage lender said underwriters and other banks had entered a lock-up agreement under which they have agreed not to dispose of the 426.7 million new shares for 20 days.

Miners pared early gains as gold prices fell into the red while platinum fell by more than three per cent.

Eurasian Natural Resources fell 2.7 per cent, Xstrata shed 1.9 per cent, while Anglo-American was up 0.2 per cent, retreating from earlier gains.

BHP Billiton and Rio Tinto shrugged off early losses on news that there may be regulatory problems with a planned $128 billion deal.

Energy stocks were resilient in the face of falling oil prices.

BP, BG Group and Royal Dutch Shell were up between 0.4 and 2.3 per cent, while Tullow Oil and Cairn Energy both inched 0.4 per cent lower.

Russia-focused Imperial Energy also shrugged off the slide in oil prices to rise 2.7 per cent after the Financial Times said the mid-cap firm has made good progress in talks with India's Oil and Natural Gas Corp. and is close to agreeing a takeover deal valuing Imperial at about $2.8 billion.

WPP gained 3.6 per cent after the advertising group beat market expectations with its like-for-like sales growth for the first half and raising its interim dividend by 20 per cent.

Among those reporting results, mid-cap Rentokil Initial shed 6.1 per cent after the services group posted a 55.3 per cent fall in first-half pre-tax profit and said the current rate of losses would continue for the rest of the year.