Britain's top share index notched up good gains on Wednesday, helped higher by a rebound in banking stocks, after a media report that said France and Germany had struck a deal to boost the euro zone's rescue fund lifted the mood.
However, a senior euro zone source poured cold water on the report by Britain's Guardian newspaper that suggested the two countries had agreed to leverage the fund to over 2 trillion euros.
"It's interesting that despite the denial the market still wants to go higher, which implies the market does think there's something in the pipeline," Jeremy Batstone-Carr, strategist at Charles Stanley, said.
UK banks found favour, with Lloyds Banking Group , Royal Bank of Scotland and Barclays firming 2.9-4.0 per cent.
Silverwind Securities highlighted that Barclays on Tuesday closed above the 50-day exponential moving average line, a momentum indicator, of 173.42 pence, and looks for a move higher to echo its last strong break above the 50-day EMA line a week ago.
Sentiment is likely to remain fragile after Moody's cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses.
The focus was firmly on Europe ahead of a weekend summit of EU leaders, with analysts anticipating a good deal of market volatility surrounding the event, originally hailed as capable of producing a comprehensive fix for the euro zone debt crisis.
Swiss & Global Asset Management's Stefan Angele describes the prevailing mood as a mix between hope -- that the EU, especially Germany and France, will devise a credible plan to stop the crisis spreading further, and will outline a map for the end game -- and frustration over a lack of decisive action.
Nerves over the security of France's triple-A rating put upward pressure on the French yields after Moody's issued a warning shot on Tuesday in its annual report on the country.
The 10-year yield spread over German Bunds earlier tested its widest levels since 1992, reached on Tuesday.
"I would expect that the muddling-through will continue, which will lead to periods of hope and periods where worries dominate the financial markets," Angele, head of investment management at Swiss & Global Asset Management, which has around 80 billion Swiss francs of funds under management, said.
"Therefore I expect a long period with high volatility in the markets with a general sideways trend."
Looking at the technical view on December 2011 futures on an intraday basis, Nicolas Suiffet, analyst at Trading Central, said the index remains in consolidation mode despite a technical rebound on Wall Street overnight -- spurred by the hopes for a plan to boost the euro zone's rescue fund.
"Quotes are still capped by the resistance threshold around 5,500/5,520 and should continue to retrace the rally that begun on October 4th," he said.
The FTSE 100 was up 59.67 points, or 1.1 per cent, at 5,470.02 by 1127 GMT, having shed 0.5 per cent on Tuesday.
Among individual movers, BSkyB grabbed the top spot on the blue-chip leader board, up 6.3 per cent, after the British satellite broadcaster posted strong growth in first-quarter profits, prompting Peel Hunt to repeat its "buy" rating.
Diageo was another good blue-chip gainer, up 4 per cent in robust volume, after the world's biggest spirits group reported forecast-beating first-quarter sales.
GKN , meanwhile, was the biggest FTSE 100 faller, off 2.7 per cent, going into following a strong run after the car and plane parts maker issued a trading update.
While analysts described the update as robust, they expressed some concern over both a softening of demand for its Driveline business in Brazil and India, and its profit margins.
Shares in GKN, on which both Investec Securities and Evolution Securities repeated "buy" ratings, had jumped about 24 per cent off lows hit on Oct. 4 up until Tuesday's close.
Home Retail was a significant mover on the second line, off 13.2 per cent in strong volume, as Britain's No. 1 household goods retailer posted a 70 per cent slump in first-half profit, with profitability at its Argos business collapsing.
Panmure Gordon, in response, chopped its current year estimates for Home Retail.
U.S. stock index futures pointed to a mixed opening on Wall Street after the previous session's strong gains, as investors digested earnings from Morgan Stanley. Other leading companies scheduled to report include American Express, and eBay .
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