Financial and mining stocks led the top share index higher Wednesday on reports European leaders were planning a bolstered bailout fund, although early gains were pared as more woeful UK data heightened recession fears.
The blue chip index <.FTSE> added 17.37 points or 0.3 percent to 5,586.09 by 11:52 a.m., off an intraday high of 5,631.88.
The Financial Times reported eleventh hour talks had begun to create a bigger financial bazooka to present to the European Union Summit on Thursday and Friday.
The benchmark index has gained around 9 percent from the closing low on November 24, as hopes have built that a solution to Europe's ongoing debt crisis might be imminent.
Riskier assets such as banks and insurers <.SXIP>, those with most to gain from a successful debt package as it would shore up confidence in the financial system, have led the rally.
Insurance buyout vehicle Resolution
Despite continuing Euro uncertainty we remain constructive on the insurers' efforts to better manage risk and to improve operationally, Deutsche Bank said.
The mining sector rallied too, having lost around a quarter of its value in 2011, on the hope that any deal in Europe would help lubricate the cogs of the global financial system and boost demand in the sector.
Citigroup remained bullish on European equities, which it said are poised to deliver returns of 15-20 percent in 2012, despite a likely recession in the euro zone next year, owing to cheap valuations, expected policy changes in the region and with no global recession in sight, although it leaned towards defensives in selecting favoured stocks.
The brokerage said it favoured industries with international exposure and low leverage, and was overweight on health care, oil and gas, basic resources, personal and household goods insurance and food and beverage companies.
Concerns lingered, however, over the performance of the broader economy and doubts that European politicians would strike a deal to solve the two-year old crisis.
After S&P warned on Tuesday of potential downgrades en masse for euro zone nations, a Reuters poll of economists showed France will lose its AAA credit rating early next year regardless of last-ditch efforts by President Nicolas Sarkozy to resolve the euro zone crisis at an EU summit this week, providing another potential stumbling block for EU leaders looking for potential investors in a bolstered bailout fund.
In the UK, British industrial output fell at its fastest pace in six months in October, reinforcing concerns the economy may be sliding into recession after a string of weak business surveys.
Those fears weighed on the retailers, which underperformed FTSE 100 gains on concerns over the outlook for the sector.
That followed a shock profit warning in the previous session from German giant Metro
Our cautious outlook on European retail has been reinforced by a series of profit warnings over the last few weeks, the bank said. With three weeks still remaining to Christmas, the outlook is worsening daily both in the UK and Europe and we still perceive considerable risk to estimates across the board.
Burberry has reached an inflexion point. After more than a decade of restructuring, the cost of sorting out legacy issues and investment in a growth platform, is set to fade as both sales and margins accelerate, said Liberum in a note.
Ex-dividend factors clipped 0.43 point off the FTSE 100 index, with AB Foods
Investec could also be one of three companies to leave the FTSE 100 when the latest quarterly reshuffle of the index is announced after the London market close on Wednesday.
Across the Atlantic, the latest weekly mortgage and refinancing indexes were released at 12 p.m., with U.S. consumer credit numbers for October due at 8 p.m., as investors search for rays of light in an otherwise gloomy economic outlook.