Britain's leading share index closed higher on Wednesday, buoyed by financials on fresh speculation of a game-changing response to the euro zone debt crisis at a weekend meeting of regional leaders.

Forecast-beating earnings from the likes of spirits group Diageo also helped drive the move, although concerns about growth continued to come through in other results, for example GKN , which capped some of the optimism.

By the close, the FTSE 100 index of leading British blue-chip stocks was up 0.7 percent, or 40.14 points, at 5,450.49, snapping a two-day losing run but still leaving the index down slightly on the week.

Volumes remained low, however, at three-quarters of the index's 90-day daily average, suggesting a solid, buyer-fuelled move further away from the trading range, established after the August selloff, is unlikely ahead of the weekend, traders said.

Financials including banks led the charge higher for most of the day, helped by a late Tuesday report in the Guardian newspaper, subsequently denied, that Germany and France had agreed a deal to boost the firepower of the region's bailout fund to over 2 trillion euros ($2.7 trillion).

Many see leveraging up the rescue fund as a central plank of a multi-pronged political response to the crisis, expected at a weekend meeting of European leaders, but such a move has consistently been rejected by Berlin.

We're waiting to see what happens, but banks are very hard to analyse at the moment. My sense is banks are cheap, but you can only say 'probably' cheap, because you can't be sure, Jeremy Thomas, chief investment officer, UK equities, at fund manager RCM, said.

Thomas, who recently closed part of his underweight on the sector, said he did not expect a magic silver bullet to emerge at the weekend to solve the crisis as the problems were largely political.

The French clearly want Europe to recapitalise the banks. The Germans want sovereign governments to recapitalise their own banks. So the two views are very different.

That difference was highlighted during the afternoon session after French president Nicolas Sarkozy said efforts to reach a deal had stalled over methods to boost the rescue fund, although market response was muted.

Lloyds Banking Group was the top sectoral gainer, up 3.4 percent, while Barclays rose 2.5 percent, supported by forecast-beating earnings from U.S. asset manager BlackRock , in which it has a stake.

As a result of the index gains, the FTSE 100 Volatility index fell 2 percent to 30.35. The lower the index, the higher investor appetite for risk. Implied volatility, meanwhile, had risen 3 percent on Tuesday, Datastream data showed.

I expect (intraday) volatility in the market to remain high until we get firm news (about a wide-ranging deal), a sales trader at a UK brokerage said. People are happy to own the equity market but are nervous in doing so.

Hedging out volatility was still incredibly expensive... institutions are still reluctant to place too much money in using a hedge as the burn rate of whatever optionality they buy is very, very high, he added.

The truth is there's a lot of cash in the market, and if people had a (euro zone debt) stability programme they could believe in, the market would go up quite aggressively.


Bumper earnings from a range of companies helped buoy the FTSE into the close, although the trend was far from universal against a still weak UK macroeconomic backdrop.

BSkyB led gainers across all sectors, up 5.1 percent, after it posted a strong first quarter, driven by cross-selling of products to existing subscribers, although new customer numbers lagged expectations.

Drinks giant Diageo, up 4 percent, also got a boost from quarterly numbers, while building supplier Wolseley rose 4.6 percent, helped by U.S. data showing a rise in U.S. home building.

That positivity failed once again to extend to the UK high street, however, as Home Retail became the latest retailer to feel the pinch of a weakening domestic UK economy on its bottom line.

The stock ended down 17 percent, leading mid-cap fallers across all sectors in volume three times its 90-day average after profits plunged 70 percent and the firm warned on the outlook.

The slide showed downgrades were not already priced in, RCM's Thomas said, as disappointments are still met with falling share prices regardless of the valuation of the market or the individual shares.

Thomas added he was expecting Europe to dip back into recession in the coming months and so was taking any bounce as an opportunity to take some risk off.

Our view is you're better off in large, multinational, defensive growth stocks, and if the market gives us an opportunity to buy those at lower prices and sell riskier stocks, we'll do that, he added.