Banks fuel FTSE gains after Lloyds upgrade

Banks led London's blue chip index up in early trading - tracking gains in Wall Street and Asia.

Exane BNP Paribas upgraded Lloyds to trigger a rise in the sector which has had a torrid year with the Eurozone debt crisis taking its toll.

Lloyds was up 4.3 per cent as Exane BNP Paribas upgraded the UK lender to "outperform" from "underperform" on valuation grounds.

"If economic conditions stabilise and Lloyds Banking Group is able to avoid raising capital then valuation of the 'Core' business starts to look highly compelling," Exane said in a note, adding there is potentially 65 per cent upside to the current share price.

That had a positive readacross for the rest of the UK-listed banks, with Barclays and Royal Bank of Scotland bouncing more than 3.5 per cent each.

Investment bank Schroders was up 2.8 per cent while Evraz, Russia's biggest steelmaker which has just joined the top index, rose more than two per cent.

The sector was also given confidence ahead of the European Central Bank's first ever offer of three-year loans which is expected to draw high demand from banks, easing fears of an impending credit crunch and possibly bolstering bond and money markets.

That partly accounted for yesterday's successful Spainish bond auction.

With risk appetite back on for the time being, equities such as integrated oils and miners rallied too.

Concerns over the outlook for consumers, however, blighted the retailer sector after chocolatier Thorntons - down more than 30 per cent today - issued a profit warning.

Meanwhile Britain's budget deficit narrowed more than expected in November compared to a year earlier, official data showed.

Separately, minutes from December's meeting showed that Bank of England policymakers left the door open for an additional injection of cash into the faltering economy in February, judging that the time was not ripe yet for more easing given uncertainty about the euro crisis.

In Asia the Nikkei closed up 1.4 per cent and the Hang Seng 1.8 per cent. The news agenda in the region was dominated by prosecutors in Japan raiding the offices of Olympus as part of a fraud probe.