Wall Street banks woke up to an unexpected positive surprise Tuesday after one of the financial sector's most prominent medium-sized investment banks posted results that exceeded analyst expectations, showing strength in the much-battered sector in spite of a highly volatile fourth quarter.

Jefferies Group (NYSE:JEF), a medium-sized investment bank that has been in the cross-hairs of many industry doomsayers over the past few weeks, posted earnings of $48.4 million, or 21 cents a share. While those numbers were 22.9 percent less than the bank's profit during the same quarter last year, they blew away analyst consensus estimates, which had Jefferies posting earnings of 14 cents per share. The company also rewarded shareholders by announcing a dividend of 7.5 cents per share.

"Jefferies is better positioned than ever to serve the needs of our clients across the globe. Competitive and legislative forces continue to evolve in ways that favor our client-focused model. We believe we can continue to add significant value and gain further market share serving our clients' needs for advice, capital, liquidity and execution in the capital markets and strategic transactions," Brian P. Friedman, Chairman of the Executive Committee of Jefferies, said in a statement.

Further showing strength, Jefferies reported it was able to decrease its levarage ratio to 9.9 times equity, from a ration of 12.9 times equity held the previous quarter. And while revenues from "principal transactions" -- the trading and market-making broker-dealers like Jefferies engage on with company funds -- declined significantly, investment banking proceeds were off by just 10.5 percent.

Shares of Jefferies soared on the positive report, rising as much as 7.2 percent from the previous day's closing price in the first minutes of trading.

The news propped up the wider banking sector, which has been down severely in recent days as bank analysts have slashed fourth-quarter earnings predictions, citing weakness in investment banking.

The KBW Bank Index, which tracks a selection of large American banks, was up 3 percent in early morning trading before settling down a few points to 36.64, 2.59 percent than the previous day's close. Those returns were outperforming the S&P 500, a broad benchmark of U.S. equities, which was up 2.14 percent. JPMorgan Chase & Co (NYSE:JPM) and Citigroup (NYSE:C) were outperforming even their sector indices.