FTSE 100 closed at its highest level this year on Tuesday as banks and miners rallied after encouraging economic data out of Europe and the U.S., although volumes were weak and traders said the market could be nearing its top.

London's blue chip index <.FTSE> closed up 63.16 points, or 1.1 percent at 5,955.91, but volumes were thin with the FTSE 100 trading 83 percent of a subdued 90-day average.

Investors' appetite was given a boost by German ZEW sentiment data which beat expectations by a large margin, and U.S. retail sales posted their largest gain in five months in February.

The data fuelled Wall Street gains, where the Dow Jones industrial average <.DJI> is trading at a near four-year high. The U.S. Federal reserve is seen keeping interest rates on hold in a statement due at 6.15 p.m., but questions remained over whether the Fed will keep the door ajar to further easing.

Orrin Sharp-Pierson, equity strategist at BNP Paribas, said equities are beginning to look expensive despite the recent rebound in global industrial activity.

He said the data likely staves off further earnings downgrades for equities, but at the current level it doesn't suggest meaningful upgrades either, which is what would be needed to support further re-ratings.

Banking <.FTNM8350> and mining <.FTNMX1770> stocks were the main drivers of FTSE 100 gains, as risk appetite improved.

Part state-owned British banks Lloyds and Royal Bank of Scotland rose 2.8 and 1.5 percent respectively, after they announced a total of 1,900 job cuts as the banks streamline operations to improve profitability following the financial crisis.

Citigroup repeated its buy rating on Lloyds. But, highlighting uncertainty surrounding the UK bank and the sector, cut its earnings forecasts for 2012 and 2013 by up to 18 percent. Citi also kept its neutral rating on Royal Bank of Scotland.

The sector has been blighted by concerns over exposure to Europe's debt crisis. But as concerns over Greece defaulting have dissipated, lessening the chance of a full blown financial crisis, volatiltiy <.VFTSE> -- a gauge of investor fear -- has fallen.

(Volatility indexes) are pricing in a slow and steady increase equity markets, without any further shocks. However, given the last 5 years of turmoil, it would be a surprise if such a Panglossian (optimistic) future existed, a London-based trader said.

IAG AVOID STRIKES

International airlines rose 4.5 percent as pilots at Spanish airline Iberia, part of International Airlines Group, called off a series of strikes intended to protest against the start-up of a low-cost airline.

Results helped Prudential
up 4.8 percent, after Britain's biggest insurer met forecasts with a 7 percent increase in its 2011 profit, helped by strong Asia growth.

Peer Standard Life gained 0.4 percent having posted a better-than-expected 28 percent increase in 2011 profit and 6.2 percent increase in dividend.

Shore Capital said despite valuation support and Standard Life's dividend yield attraction it preferred annuity companies such as Legal & General and Prudential.

Legal & General added 3.4 percent ahead of results due out on Wednesday.

Inchcape gained 11 percent after the multi-national car dealer reported better-than-expected results for 2011, driven by demand for premium vehicles in the Asia-Pacific and emerging markets.

A record increase in goods exports to non-EU countries driven in part by car exports to the United States, Russia and China meant Britain's goods trade deficit widened less than expected in January.

British house prices fell at their slowest pace since July 2010 last month, and surveyors expect prices to stabilise in the coming months as the economic outlook brightens, the Royal Institution of Chartered Surveyors said.

Housebuilders pushed higher, led by Barratt Development up 5.3 percent, as Credit Suisse raised estimates and target prices across the sector.

On the downside, Antofagasta missed out on the mining sector rally, shedding 2.3 percent as the copper miner said it would pay a special dividend of 24 cents a share, below market expectations, despite a 32 percent rise in profit boosted by metals prices.

And Security services firm G4S was also a faller, down 2.1 percent, after its full-year results failed to excite investors.

The quarterly earnings season has served up a mixed bag. As of Monday, of the companies that have reported 51 percent have beaten or met expectations, according to Thomson Reuters Starmine data.

(Written by David Brett; Editing by Elaine Hardcastle)