The FTSE 100 hit a five-week closing high on Monday with optimism rising that politicians can finally agree a deal to solve its debt crisis in a crunch week for the euro zone.

European Union leaders, urged on anxiously by the United States, are seeking agreement on a convincing rescue plan that has eluded them for two years, culminating in a summit in Brussels on Thursday and Friday.

Mike Lenhoff, chief strategist at Brewin Dolphin said this Friday could be make or break the euro zone with the markets hopeful of the former.

If Mrs Merkel (Germany's Chancellor) gets her way with fiscal integration, market sentiment will be dramatically transformed. To say that equity markets, especially the banks, will have something to celebrate understates it, he said, adding that would prompt a big exit out of bond markets.

London-listed banks <.FTNMX8350> have gained around 16 percent over the last 8 trading days, spurred by coordinated action by major central banks to provide liquidity to the financial system and on hopes a solution to Europe's debt crisis might be found.

On Monday, Lloyds Banking Group and Royal Bank of Scotland added 6.3 and 5.3 percent, respectively, as France and Germany agreed on a series of reforms to address the euro zone sovereign debt crisis that will be presented to EU President Herman Van Rompuy on Wednesday.

And with Italy drawing up its roadmap to deficit reduction and having been the biggest worry within the euro zone recently, traders said there's a belief that the worst might now be over.

FTSE 350 banks and insurers <.SXIP> which remain down respectively more than 25 and 10 percent in 2011, hamstrung until Europe's debt crisis is resolved, helped the FTSE 100 <.FTSE> to rise 15.87 points, or 0.3 percent, at 5,567.96, its highest close since October 31.


Miners <.FTNMX1770> rallied too as investors looked to buy beaten down assets which have shed more than a quarter of their value this year as the global downturn left question marks over the outlook for growth.

JPMorgan said the European debt crisis, U.S. fiscal austerity and prospects for a Chinese hard landing will keep volatility high and could result in lower markets in 2012 if these conditions worsen.

But it said a strong policy response from governments and a better-than-worst-case scenario for corporate earnings leaves some European equities looking attractive on valuation grounds.

We believe selected cyclicals have been penalized too much, especially the emerging market sensitive ones. We find value in 'low ROE' (return on equity) and 'Value' styles, JPMorgan said in a note.

Elsewhere, International Airlines Group , formed by the merger of BA and Iberia, climbed 2.9 percent after it posted a 2.1 percent rise in passenger traffic in November, boosted by 4.6 percent growth in premium traffic.

On the downside, equities that have performed well over the last year fell as the investors tucked into riskier assets.

Drugmaker Glaxo SmithKline fell 1.6 percent, British American Tobacco shed 0.8 percent, while Burberry , liked for its exposure to China and up more than 12 percent in 2011, fell 3.4 percent.

Investors also continued to penalise corporates falling short of expectations, with Michael Page's shares slumping to their lowest level since late 2009 after the British recruitment company warned its full-year profits will be towards the bottom end of analyst forecasts due to the impact of the European economic crisis on its business.

Concerns remained over the broader economic outlook as Europe's debt crisis might have pushed its economy into a steeper contraction than earlier thought and growth in China is spluttering, according to surveys on Monday.

(Editing by Hans-Juergen Peters)