The FTSE 100 was higher at midday on Tuesday, driven by oil stocks as Citigroup forecast rising 2012 crude prices, while some analysts tipped slight gains for the index next year despite the austere backdrop.
Citigroup forecast that Brent crude would trade in a range of $100 to $120 a barrel for the year, up from a previous forecast of $86/bbl, citing supply disruptions, low inventories and political tensions.
Oil giant BP
Citigroup warned it was not optimistic on oil demand growth, however, and downgraded Royal Dutch Shell
The UK's benchmark index <.FTSE> had added 39.57 points, or 0.7 percent, to 5,467.43 by 1134 GMT, in thin, choppy trade, having shed 1.8 percent on Monday as doubts persisted over the plausibility of the agreement made by leaders at Friday's European Summit.
Barclays Capital said it saw modest upside potential for European equities in 2012, given a no-growth domestic macro backdrop, leaving corporates dependent on ex-Europe exposure to generate profit growth.
The broker said, amongst sectors, it favours those with global exposure such as Chemicals, Oil Services and Industrials, as opposed to the more domestically oriented ones such as Utilities, Telecoms, Retail and Travel & Leisure.
Barclays Capital said investors would demand hard proof of credible short-term and more radical long-term institutional and structural reforms at the eurozone and European Union levels, before pricing in a less pessimistic scenario and allowing any sort of rerating to occur.
UK INFLATION EASES
With inflation a major threat to global economic recovery, there was relief that British consumer price inflation (CPI) eased in November as expected, taking the annual inflation rate to 4.8 percent.
Newedge Strategy said it expected UK CPI to run at a much more modest 3.5 percent by the end of first quarter of 2012.
That should provide some cheer to retailers such as Carpetright
Carpetright posted its worst-ever first-half results, but its shares rose 9.3 percent as it said it expected its performance to improve in the six months to the end of April and confirmed its full-year guidance.
Panmure Gordon, which said the results should represent a nadir for the company, upgraded the stock to hold from sell.
FTSE 100 gains were supported by the prospect of a rebound when Wall Street opens later on Tuesday, ahead of U.S. November retail sales numbers due at 1330 GMT, with investors keen to see more signs of an improvement in the world's biggest economy.
Analysts forecast an increase of 0.5 percent, the same rise seen in October, while October business inventories will be released at 1500 GMT.
The main focus, however, will be on the outcome of the latest Federal Reserve Open Market Committee (FOMC) meeting, due at 1915 GMT after the London market close.
Concerns over the European debt crisis were never too far away though, highlighted by gains in defensive stocks such as Vodafone
Banks <.FTNMX8350> lagged the broader rally as ratings agency Moody's said it would review ratings of all EU member states in the first quarter of 2012, while rival Fitch said the summit had failed to provide a comprehensive solution to the debt crisis.
Italian bond yields rose on Tuesday as markets fretted over the risk of sovereign rating downgrades across the euro zone.
Nomura added to the pressure on the banks as the broker cut its pan European banking sector rating to neutral from bullish.
Despite valuation support, the economic and sovereign outlooks provide headwinds, Nomura said in a note.
(Editing by Will Waterman)