Banks led Britain's top shares higher on Monday morning, as investors anticipated a crucial EU summit scheduled for Friday.

French President Nicolas Sarkozy and German Chancellor Angela Merkel will 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.

Sentiment was given a lift after Italy unveiled austerity steps on Sunday.

The benchmark FTSE 100 <.FTSE> was up 10.81 points, or 0.2 percent, at 5,563.10 by 0906 GMT, having firmed 1.2 percent on Friday to take its gains for the week to 7.5 percent.

In spite of the upbeat short-term market mood, a good deal of uncertainty remains in Europe's attempts to resolve the euro zone's debt crisis.

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.

Michael Hewson, analyst at CMC Markets, said: Recent market moves would seem to predicate a positive outcome this week; however, given recent history and the propensity of markets to get ahead of themselves, it would not be a surprise if the reality fell short.

Talk of fiscal union is one thing, being able to deliver even a framework for it is another. While politicians could well agree on a plan, as Greece has shown us in the past few months, actually delivering it can be rather more difficult.

Goldman Sachs 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.

Banking stocks <.FTNMX8350> made most headway in early trade, with Lloyds Banking Group and Royal Bank of Scotland and Barclays enjoying gains of 5.8 percent, 4.4 percent and 3.4 percent.

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.

On the second line, TUI Travel , Europe's biggest tour operator, added 0.8 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; Editing by Will Waterman)