Banking stocks helped drive an advance in the FTSE on Monday ahead of a crucial EU summit later in the week.

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet on Monday to outline joint proposals for more coercive budget discipline in the euro zone, which they want all 27 EU leaders to approve at the summit.

Italy's austerity steps unveiled on Sunday also provided a more positive tone.

The banking sector <.FTNMX8350>, which has been beaten down by the euro zone crisis, made the most headway, spearheaded by an 8.3 percent jump in Lloyds Banking Group , while Royal Bank of Scotland and Barclays added 5.3 percent and 2.8 percent respectively.

Deutsche Bank said it remained positive on UK domestic banks in the long term, given low valuations relative to managements' and its own forecasts, strong domestic retail businesses, cost-cutting potential, and the more favourable position of the UK economy relative to parts of Europe.

Key downside risks, the bank said, related to a continued and worsening disruption in sovereign and bank funding, a downturn in capital market revenues and credit quality.

Elsewhere among financials, Aviva added 1.2 percent, supported by press reports suggesting the insurer was considering selling a chunk of the billions of pounds worth of UK pension assets it owns.

The Sunday Telegraph said the move would be made as the firm looked to boost the amount of capital it holds on its balance sheet.

U.S. stock index futures rose more than 1 percent on Monday as investors, heartened by a string of upbeat U.S. economic data, waited for releases including the November non-manufacturing ISM index and October factory orders.

Despite the upbeat market mood, investors remained wary that even if European leaders do manage to agree on a definitive plan to solve the region's debt crisis, there are still significant hurdles to overcome.

Even if the Euro is saved it will become clear very soon that Europe is entering a recession with a lot of austerity and very little growth, so 2012 will be a very difficult year no matter what happens this week, said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.

JPMorgan said the European debt crisis, U.S. fiscal austerity and a Chinese hard landing will keep volatility high and could result in down markets in 2012 if these conditions worsen.

But it said a strong policy response from governments and a better than worst case scenario for corporate earnings leaves some European equities looking attractive on valuation grounds.

We believe selected cyclicals have been penalized too much, especially the emerging market sensitive ones. We find value in 'low ROE' (return on equity) and 'Value' styles, JPMorgan said in a note.

Goldman Sachs, meanwhile, said equities across Europe needed to discount a deeper economic downturn and more downward earnings revisions, though it does expect a trough at some point in early 2012.

The bank's targets for the FTSE 100 are 4,700, 5,400 and 5,800 on a three, six and 12-month basis, respectively.

The UK benchmark <.FTSE> was up 42.51 points, or 0.8 percent, at 5,594.80 by 12:24 p.m. BT, having risen 1.2 percent on Friday to take its gains for the week to 7.5 percent.

We've been stuck in a range of 5,100 to 5,600 since the summer, and I think it would be a brave man to say that the market is really going to take off from here, Martin Dobson, head of trading at Westhouse Securities, said.

We're not out of the danger zone but there's probably a little bit of light being shone at the end of the tunnel now, so people are taking heart from that, but it's probably still too early to get carried away and say 'Problem sorted'.

On the second line, TUI Travel , Europe's biggest tour operator, edged up 0.1 percent after unveiling full-year profit at the top end of forecasts, buoyed by strong online sales and demand for exclusive resorts -- offering a stark contrast to struggling rival Thomas Cook .

(Additional reporting by Jon Hopkins and David Brett)