(Reuters) - The FTSE 100 rose on Thursday as gains in banks, which were given a boost by a Spanish debt auction and structural reforms by RBS, outpaced losses in retailers knocked by a profit warning from Tesco.
The UK's benchmark index was up 22.02 points, or 0.4 percent at 5,692.84 by 1125 GMT.
RBS was up 9.2 percent as analysts commended the lender's plan to cull investment bank jobs and sell or shut equities and advisory business under a 3-year plan to further reduce risk and focus more on domestic retail and corporate banking.
We welcome this decision to further de-emphasise the company's less profitable, riskier and more capital intensive operations, Gary Greenwood, analyst at Shore Capital said.
Shore Capital, however, retained its sell rating on RBS reflecting ongoing economic challenges.
Banks' shares, which fell around 30 percent in 2011 on concerns over the potential collapse of the financial system, the cost of regulatory reform and exposure to Europe's debt crisis, rallied too as Spain saw demand for its new three-year paper at 1.8 times the amount on offer, with average yields easing to 3.384 percent, raising hopes the country could avoid future default on its debts.
The auction provided guidance ahead of an Italian bond sale on Friday.
HSBC lagged, up just 1.3 percent as BofA Merrill Lynch downgraded the lender to underperform from neutral, on concerns revenues will miss expectations.
Investors were also looking ahead to the Bank of England's decision on interest rates and the quantitative easing programme, due at 1200 GMT, with no changes anticipated.
The European Central Bank is set to announce its interest rate decision at 1245 GMT, also with no changes anticipated.
Fund manager Ashmore gained 5.4 percent as it saw a small rise in assets in the fourth quarter.
Peel Hunt, which repeated its buy rating on Ashmore, said it is uniquely placed to benefit from the shift in institutional asset allocation and the valuation gives no credit to its emerging market exposure.
Miners were higher as China's annual inflation eased, raising the possibility of a shift in policy priorities away from containing price increases and towards supporting growth in the world's most voracious consumer of commodities.
The UK High Street continued to feel the pain of a bleak economic outlook and UK austerity measures, which forced consumers to preserve their cash over Christmas.
Tesco fell 14 percent to a 33-month low after the world's third-largest retailer said it would invest more in price cuts and its online business to win back sales, warning that would lead to minimal profit growth in its 2012/13 year compared with a forecast for a 10 percent rise.
Shore Capital cut its rating on Tesco to hold from buy.
Peer Morrison and Marks & Spencer, which have already reported on their Christmas trading, dipped 6.3 and 1.5 percent respectively.
Sainsbury, which updated investors on Wednesday, shed 4.8 percent as Credit Suisse revised its profit forecasts and repeated its underperform rating, saying there is still not enough margin/returns progress for us to view the valuation as attractive.
There was bad news too from mid-cap Home Retail, down 4.5 percent, as it said it expected to cut its full-year dividend significantly after seeing another poor sales performance at its Argos stores.
Struggling small cap chocolatier Thornton melted 15 percent on falling sales and as promotions hit its margins.
Elsewhere, pay-TV group BSkyB fell 2 percent after downgrades by Citigroup, Investec and UBS, which cited slowing broadband growth, the expected rising cost of new premier league rights and the stock valuation -- 14 times 2012 earnings per share -- as reasons for the downgrade.
Energy shares slipped led by Royal Dutch Shell , down 2 percent, with traders pointing to rumours the company was guiding lower on fourth-quarter earnings.
Chevron, the second-largest U.S. oil company, said on Wednesday fourth-quarter profit would be significantly below the previous quarter.
Darren Sinden, senior sales trader at Silverwind Securities, said commodity stocks and (by virtue of their heavy index weighting the FTSE) could continue to see a push and pull effect as mining and oil shares ebb and flow on the strength of the dollar -- boosted by its safe haven characteristics and signs of an improving economy in the U.S. -- which is good for profits but bad for the underlying commodity prices on which their profits are built.