The FTSE rallied on Monday as financial and basic resources stocks advanced, helped by hopes that euro zone leaders were moving closer to action to stem a debt crisis in the region.

London's blue chips <.FTSE> added 148.11 points in its second consecutive day of gains after nine straight sessions of declines, as equities across Europe and the United States rose and yields on distressed euro zone bonds declined.

The rally was triggered by an unsourced report in Italian daily La Stampa, which suggested the International Monetary Fund was preparing a rescue plan for Italy worth up to 600 billion euros ($796 billion). This was later dismissed by an IMF spokesperson.

(The FTSE) is coming off oversold level and given the denial of rumours that the IMF was going to get involved, I'm a little bit surprised with the strength of the rebound, Gerard Lane, investment strategist at Shore Capital, said.

London's blue chip gauge broke through the 38.2 percent Fibonacci retracement of the July high to August low, as it extended a bounce after closing above the 23.6 percent support on Friday.

Banks and miners, which suffered some of the worst losses during the recent sell-off, led the charge on Monday, adding 28.4 points and 24.4 points to the FTSE 100.

Miners were also supported by positive comments by Nomura, which argued the sector had been hit too hard in the macro sell-off, driven by global growth worries.

Shore Capital's Lane maintained a defensive approach but highlighted that certain perceived safe havens such as food producers are overvalued, while cyclicals including mining and consumer discretionary stocks appear cheap.

Miners have become undervalued, but without an easing in policy from China, earnings downgrade may outweigh the valuation appeal for that sector, he said, recommending instead media stocks with international earnings, such as Pearson
or Reed Elsevier , up 2.1 percent and 2.6 percent, respectively.

Weir rose 8.3 percent to top the blue-chip gainers chart as Barclays Capital became the latest of a string of brokers raising their price targets on the maker of pumps and valves, following the acquisition of shale gas specialist Seabord Holdings last week.

Randgold , down 7.9 percent, was the only blue chip to close in the red after the gold miner cut its output target due to a series of problems at its Tongon mine in the Ivory Coast.

LINGERING CAUTION

While stocks rebounded, strategists remained wary of going back into the market until there is certainty that decisive political action is being taken to stem the euro zone's debt crisis.

It's a market I would sell, like I have been doing since August. If you had bet on political events for the past two years, you'd have gone bankrupt a long time ago, said Robert Quinn, chief strategist at Standard & Poor's Capital IQ.

In a sign of the urgency of the euro zone's situation, Moody's warned that the rapid escalation of the region's sovereign and banking crisis threatens the rating of all European government bonds.

The announcement comes as the euro zone's second-largest economy, France, battles to defend its triple-A rating, a necessary condition for the bloc's rescue fund, the European Financial Stability Facility, to maintain its own top-notch rating.

S&P's Quinn believes some form of bazooka option, designed to prevent the sovereign crisis from spiralling into a credit crunch, will need to be put in place by January, when the funding and refunding cycle for banks and sovereigns resumes at full speed.

The political endgame is probably nearer than we think, he added.

France and Germany, which aim to outline proposals for a fiscal union before a European Union summit on December 9, were stepping up a drive for coercive powers to reject euro zone members' budgets that breach EU rules ahead of a meeting of euro zone finance ministers in Brussels tomorrow.

(Additional reporting by Simon Jessop, David Brett and Brian Gorman; Editing by David Cowell)

(The following story corrects second paragraph to nine straight sessions, not 10)