The top share index closed higher on Thursday, led by banks after bullish earnings from their U.S. peers and with hopes building that the recent coordinated action by central banks and the IMF would be enough to avoid an economic crisis.

The FTSE 100 <.FTSE> index rose 38.78 points, or 0.7 percent, to 5,741.15, after breaking resistance at 5,700.

The index closed above that level on Wednesday, for the first time since the end of October, and extended gains from its recent low in mid-December to around 7 percent.

Volumes were heavier than in recent months -- 153 percent of their 90-day average -- evidence investors are growing in confidence.

More and more people are realising what a bazooka that (the recent action by central banks and the IMF) is, Steven Bell, director at hedge fund GLC, said.

Because everyone is so bearish we see a lot of upside from here, he said.

Banks <.FTNMX8350>, which fell around 30 percent in 2011, gained on Thursday, with Barclays up 10 percent, as investors feasted on bullish results from U.S. firms Goldman Sachs, Bank of America and Morgan Stanley.

After a soggy start to the earnings ... it's now looking pretty good. Financials have leapt today and we think that overall earnings will be quite a big beat, GLC's Bell said.

The sector, which is acutely exposed to Europe's debt crisis, also got a lift after Spain passed a key test in the bond market, selling more longer-term debt than had been expected.

Key to sentiment though remained Wednesday's news that the International Monetary Fund's involvement in helping countries deal with fallout from the crisis.

And investors received a further boost, with traders citing media reports that Klaus Regling, the head of the euro- area bailout facility, is confident that the fund's reach can be increased as much as fourfold, despite its recent downgrade by S&P.

Other beaten down financials benefited from the feel good factor with insurers such as Aviva up 5.2 percent, and investment firm Schroders 5.3 percent higher.

FLYING HIGH NOW

Airlines, which have come under pressure as the outlook for the global economy has deteriorated in recent months, rallied too, with traders citing HSBC's upgrade of German carrier Lufthansa as having a positive readacross for the sector.

British Airways owner IAG climbed 6.5 percent higher.

It wasn't such good news for the retailers as Sainsbury underperformed after Goldman Sachs downgraded its rating for the grocer to sell from neutral and cut its earnings forecasts across the sector by up to 21 percent.

Following Tesco's profit warning on January 11, we believe the UK food retail sector outlook has significantly worsened. Tesco announced margin investment, and as a result we expect negative pressure on sector profitability, Goldman Sachs said in a note.

The broker also downgraded its rating for Tesco to neutral from buy, and repeated its sell rating on Wm.Morrison .

Tesco , however, rose 1.9 percent on news U.S. billionaire Warren Buffett's investment vehicle Berkshire Hathaway had increased its holding in the company to more than 5 percent

In heavy trade -- 380 percent of its 90-day average -- British publisher Pearson
fell 1.3 percent with traders citing valuation concerns after it bumped up its 2011 earnings guidance for the third time in three months.

Jonathan Jackson, head of equities at Killik & Co, said: Following a strong share price performance over recent months, the stock is now trading on 14.5 times consensus 2013 earnings ... the current valuation is fairly full and we would look to take profits.

And with appetite for risk improving, defensive stocks featured prominently on the FTSE 100 fallers list.

Tobacco stocks were weak, led by BAT down 2.2 percent, as Nomura downgraded its stance on the sector to neutral from bullish in a preview of upcoming results, citing high relative valuations.

AstraZeneca shed 1.3 percent after U.S. drug regulators said they needed further data, possibly including new clinical studies, before approving a new diabetes drug from the Anglo-Swedish group and U.S. partner Bristol-Myers Squibb BMY.N.

(Written by David Brett; Editing by Elaine Hardcastle)