Blue chip shares rose for a second day on Tuesday, helped by a rebound in banking stocks after solid demand at a Spanish bill auction eased some worries about banks' exposure to euro zone sovereign debt.

Barclays was the top blue chip gainer, jumping 4.2 percent and adding around 4 points to the FTSE index, after BofA Merrill Lynch said earnings upgrades could be on the horizon for the lender.

Banks <.FTNMX0530>, however, will probably remain vulnerable as concerns about Spain's ability to meet its deficit targets persist and Spanish yields rose at the debt auction despite the strong demand for 12 and 18-month bills.

The auction was seen as a signpost for Thursday's more important auction of 10-year Spanish debt.

There is a slight improvement in the banking sector after weakness yesterday but again I think that few investors are overcommitting to the banks right now given the expectation that the sector will need recapitalisation if tier 1 targets are to be met in June, said Jeremy Batstone-Carr chief strategist at Charles Stanley.

At 1109 GMT, the UK blue chip index <.FTSE> was up 48.88 points, or 0.9 percent at 5,715.16, adding to the previous session's 0.3 percent rise.

Schroders gained 2.7 percent as Citigroup upgraded its rating for the investment firm to neutral from sell on valuation grounds in a broader note on asset managers.

Also moving on broker comments, broadcaster ITV rose 2.1 percent after Exane BNP Paribas upgraded the company to outperform from neutral on growing confidence in ITV's capacity to beat consensus expectations.

ITV should benefit more broadly from the BBC's cost-cutting plan. In addition, advertising trends in Europe are reshuffling market positions between pubcasters, commercial FTA and pay-TV operators, Exane BNP Paribas said in a note.

RETAIL STOCKS FALL

Retail stocks led the losers on the FTSE 100 index with Burberry Group and Marks and Spencer shedding the most after trading updates.

Luxury brand Burberry Group fell 4.7 percent as it met analyst forecasts with an 18 percent rise in second half sales. Traders said it was time to take profits on the stock after expectations had risen too quickly over the last quarter, with the shares up 28 percent in the year-to-date.

Bellwether retailer Marks & Spencer shed 2.9 percent as it missed forecasts for underlying fourth-quarter sales, with growth in food sales failing to offset a weaker outcome in general merchandise.

British inflation ticked up in March, driven by higher food and clothing prices and reinforcing expectations the Bank of England will not inject more stimulus into the economy next month.

Another batch of U.S. data will be scrutinised later, with March housing starts and permits scheduled for release at 1230 GMT, and March industrial output figures due at 1315 GMT.

Ahead of that data, U.S. stock futures <.SPX1> <.DJC1> <.NDC1> pointed to a higher open on Wall Street on Tuesday, after a mixed showing in the previous session, with investors looking to some key corporate earnings for direction.

Among the big names reporting on Tuesday will be Goldman Sachs and Coca-Cola ahead of the market open, with Intel earnings due after the New York closing bell.

(Editing by Susan Fenton)