The FTSE 100 <.FTSE> rebounded in low volume on Tuesday, with energy stocks rallying on the back of soaring oil prices.
The oil & gas sector <.FTNMX0530> index rose 2.3 percent, tracking a rise in the price of crude.
That came after the International Energy Agency said it expected demand growth next year, and Citigroup raised its Brent forecast for 2012, citing supply disruptions and low inventories.
Remarkably resilient oil prices helped oil and gas shares retain top spot as investors' preferred sector for a seventh consecutive month in December, a survey by BofA Merrill Lynch showed.
What we typically find in recessions is that at a certain point, it (the oil & gas sector) takes very defensive characteristics in terms of cash flow, dividend and visibility and that's what we're really seeing now, Gary Baker, head of BofA-ML's European equity strategy, said.
The oil company's shares were the biggest gainers in the FTSE 100, surging 5.1 percent on volume of 160 percent of their 90-day average.
However, equity weightings in investment portfolios are historically low due to weak liquidity and uncertain corporate earnings, BofA-ML's study showed.
In a sign of investors' scepticism towards equities, volume on the FTSE 100 was less than 80 percent of the 90-day average as the index closed 1.2 percent higher at 5,490.15, after hitting a day low of 5,413.70 in morning trade.
We see a lot of wide daily ranges and this could be the result of day traders and lack of liquidity in markets, Roelof-Jan van den Akke, senior technical analyst at ING, said.
Van den Akke expects the FTSE to record a loss this week, hit by a strengthening in the dollar, before closing the year at around 4,800-4,900 points, an annual loss of between 9 percent and 11 percent.
After the close, investors were awaiting details from the Federal Reserve's FOMC final scheduled meeting of the year.
The U.S. central bank was expected to hold off on offering the economy any fresh stimulus as it weighs encouraging signs on the recovery against the risks coming from Europe.
(Editing by David Hulmes)