A sharp rise in mining stocks helped lift the top share index by midday on Tuesday, with the sector boosted by stronger than expected global manufacturing data.
The blue chip index <.FTSE> was up 68.88 points, or 1.2 percent, at 5,641.16 by 12 p.m. on the first trading day since the New Year break, as it played catch up with European indexes that posted strong gains on Monday.
Miners, which fell around 30 percent in 2011, contributed more than a third of the gains to the FTSE 100, with Rio Tinto
British manufacturing beat expectations in December, showing signs of stabilising after a two-month decline as orders from China and Germany picked up, although the risk of another recession persists.
That risk has left the FTSE 100 derated, trading on a historic price-to-earnings ratio of around 10 times, compared with an average of about 14 times.
Equities offer the most attractive risk return compared to bonds, commodities and high yield debt ... (But) for equities to have a powerful rally and break above their 200-day moving averages it would require financials to also perform, said Jefferies International in a global equity strategy note.
The UK's benchmark index ebbed away from intraday highs of 5,682.44 as it faced the challenge of closing above its 200-day moving average, currently around 5,610, which it has failed to do since late July 2011.
Jefferies said with global growth slowing, equities may find themselves range-bound until further quantitative easing is adopted: Equities are cheap versus bonds but the asset class can't break out until the velocity of money increases in the global economy.
The main UK index has an average dividend yield of around 4.0 percent, compared with a yield on a 10-year gilt of 2.03 percent.
Banks -- around 30 percent lower in 2011 -- also climbed as investors dipped into riskier assets perceived to have been dealt with harshly in 2011 on the back of fears over the health of the global economy.
There was strength too in the FTSE 350 retailers, which endured a tough 2011, as investors braced themselves for a raft of Christmas trading updates hoping the worst of the news was already priced in.
The sector currently trades on a historic price to earnings of 9.48 times and a price to book ratio of just 1.48 times.
Analysts at Espirito Santo and Seymour Pierce, however, said they were expecting little in the way of post-Christmas cheer to boost investor appetite in the sector.
Marks & Spencer
Wall Street futures pointed to a firmer open for U.S. equities, helping sustain gains on Britain's top share index, with investors looking ahead to December U.S. ISM index and November construction spending numbers, both due to be released at 3 p.m.
Defensive stocks, those which outperformed in 2011 as investors went in search of safe havens while the outlook for the global economic worsened, were the main faller on the UK index as some risk appetite returned among investors.
Smith & Nephew