The FTSE share index inched higher by midday on Thursday, driven by gains in integrated oils which were supported by firm crude prices, although worries over the broader economy persisted after the most recent Italian bond auction.
London's blue chips <.FTSE> rose 8.01 points, or 0.2 percent to 5,515.41 by 11:53 a.m. BT, in thin trade at just 14 percent of its average 90-day volume.
Integrated oils <.FTNMX0530> rose, propped up by oil prices, with Royal Dutch Shell
Brent crude steadied above $107 a barrel, still showing the impact of Iran's threat to block flows through the Straits of Hormuz, a vital trade route.
Integrated oils have outshone other cyclicals such as banks <.FTNMX8350> and miners <.FTNMX1770> in 2011, with the sector supported by the resilient oil price and its defensive characteristics in the face of global economic worries.
What we typically find in recessions is that at a certain point (the oil and gas sector) takes very defensive characteristics in terms of cash flow, dividend and visibility and that's what we're really seeing now, said Gary Baker, managing director and head of European equity strategy, BofA Merrill Lynch.
Specialty metals and miners <.FTNMX1770> rallied after falls on Wednesday, with BHP Billiton
Russian steelmaker Evraz
UK outsourcer Serco
Concerns remain over banks' willingness to lend -- a key component in countries generating the growth needed to reduce the debt piles that is threatening to drive parts of the economy into recession.
Despite coordinated intervention from central banks, lenders continue to hoard cash -- they deposited a record 452 billion euros with the ECB's overnight facility on Tuesday rather than lend to each other -- reinforcing investors fears over the potential for a credit crisis akin to that of 2008.
As banks choose to conserve cash rather than lend, bond yields in deeply indebted euro zone countries such as Spain and Italy remain dangerously high.
Italian bond yields fell from recent record highs at auction on Thursday, but cautious investors still demanded a near 7 percent yield to buy 10-year paper, a level seen unsustainable over time for the euro zone's third-largest economy.
David Miller, partner at Cheviot Asset Management which has assets of 3.5 billion pounds, said while other euro area bonds have been savaged in 2011, the gilt market has shown Britain to be a beacon of sanity in Europe.
We have a stable government with a plan to reduce the deficit, an empowered central bank, and a floating currency. This is not a bad combination for surviving difficult times, he said.
Equities continue to look good value, despite the economic turmoil, compared to other asset classes, with the FTSE 100 trading on price to earnings ratio of around 10 times, compared to an historical average of about 14 times, according to Thomson Reuters data.
The main UK index has an average dividend yield of around 4.1 percent, compared to a yield on a 10-year gilt of 1.982 percent and Bank of England interest rates at 0.5 percent.
(Editing by Hans-Juergen Peters and Jon Loades-Carter)