The top share index rose on Tuesday, as earnings from UK corporates such as Lloyds Banking Group
Miners and integrated oils, rising with commodity prices, also helped the UK's benchmark index <.FTSE> close up 56.52 points, or 1 percent at 5,567.34 but well off the intraday high of 5,616.00.
Traders urged caution warning volumes suggested there was little sustenance to the current rally.
Until the fund managers are convinced a solution has been found to the debt crisis there going to be reluctant to come in from the sidelines, which leaves the market susceptible to a sell-off, which is what we saw late on, Jimmy Yates, head of equities at CMC Markets, said.
Lothar Mentel, chief investment officer at Octopus Investments which manages $4 billion (2 billion pound), said: Our positioning remains cautiously defensive, very much mindful that investor sentiment and newsflow from the Eurozone is likely to continue to cause market gyrations.
That sentiment was reflected in some of the gains seen by UK blue chips.
Food and retail group Associated British Foods (ABF)
We view ABF as an attractive investment proposition, particularly so with ongoing economic and political uncertainty leading to volatility in equity market, Shore Capital said repeating its buy rating on the stock.
Luxury goods group Burberry
But worries over growth for European companies next year were highlighted by Bank of America Merrill Lynch, which cut its 2012 earnings per share year-on-year growth forecasts for European companies to zero from a previous 7 percent rise.
We still see downside risk from potential news flow on sovereign debt issues but recognise that it would take relatively little good news to prompt a sharp rally in markets, the broker said.
The FTSE index has found support above its 50-day moving average of around 5,480 but remains short of the 200-day MA ceiling, the level at which the index retreated sharply from in late October.
The relative strength index suggested UK blue chip equities had a little further to travel before they look too expensive. The shares are currently trading around the 57 percent level where 70 percent suggests overbought territory.
EYE ON EUROPE
The UK market pared gains at the close as Italian Prime Minister Silvio Berlusconi lost his parliamentary majority.
Despite winning a crunch parliamentary vote on budget policy, his reform-shy government's borrowing costs soared into the euro zone's danger zone with investors fearing a new, bigger Greece.
Italian 10-year bonds hit a fresh euro-era high of around 6.757 percent.
UK banks <.FTNMX8350>, which have been scrambling to reduce their exposure to Europe's debt crisis, closed off their highs.
Lloyds rose 4.4 percent as management reiterated full-year guidance on margins, despite posting a third-quarter loss.
Seymour Pierce analyst Bruce Packard said: There do not seem to be any monsters in these results and we welcome Lloyds eventual acknowledgement of reality.
FTSE heavyweight Vodafone
London's blue chips remain attractive to investors with a current dividend yield of 4.08 percent on a price to earnings of 10.67 times, below the 10-year average of around 14.
The yield compares favourably to UK 10 year bonds, which trade on a yield around 2.266 percent but with concerns lingering of their direct exposure to Europe's debt crisis.
On the downside, InterContinental Hotels Group