The FTSE share index hit a one-week closing high Tuesday, after a drop in Spain's borrowing costs and encouraging data from Germany overshadowed fears over Europe's debt crisis.
Short-term financing costs for Spain more than halved as banks lapped up debt at an auction, with much of the purchasing power said to have come from cut-rate loans from the European Central Bank (ECB).
This, alongside data showing a sharp rise in German business sentiment in December and U.S. housing starts hitting a 19-month high in November, had a positive knock-on effect on risky assets such as banks.
The UK banking sector <.FTNMX1770> recouped losses from the previous session when the British government backed proposals to force lenders to separate their retail and riskier investment arms.
But against the backdrop of light volume, with choppy short-term-driven trade likely to feature over the festive period, traders played down the significance of any moves.
There's not an awful lot of mileage in it -- it's a trader's market, it's certainly not an investor's market, Michael Hewson, analyst at CMC Markets, said.
The UK benchmark FTSE 100 <.FTSE> ended up 54.61 points, or 1 percent, at 5,419.60, its highest close since December 13, having shed 0.4 percent Monday. It traded just 85 percent of its 90-day average volume.
The FTSE 100 has fallen more than 8 percent this year.
Andrew Bell, chief executive of the 1.1 billion pound Witan Investment Trust, said that after derating, equity markets look attractive, especially relative to certain government bonds -- provided meltdown in the European banking sector is avoided.
He said: 2012 will turn out economically less bad than feared. Despite the immediate volatility risks, a shift toward looser monetary policy and the promotion of economic growth seems under way.
Bell added that there are well-articulated economic problems, but not the same risk to markets from forced deleveraging as occurred when hedge funds had to retrench after the collapse of investment bank Lehman Brothers in 2008.
Stefan Angele, head of investment management at Swiss & Global Asset Management, which has around 80 billion Swiss francs ($86.08 billion) of funds under management, identified two crucial measures investors must adopt in 2012 given that economic and political uncertainties are running high.
One is diversification to avoid counterparty and cluster risks, and the other is to ensure liquidity. Therefore, highly regulated and daily tradable investment vehicles like funds are attractive.
Drugmakers came under pressure after AstraZeneca
With the weakest pipeline of its European peers, AstraZeneca, off 1.5 percent, was hit hardest by a double blow to treatments for cancer and depression.
These triggered $381.5 million in charges and will push 2011 profits to the lower end of its forecast range.
UK peer GlaxoSmithKline
(Editing by David Hulmes)