FTSE:5,174.25 (+44.63) Mid-250:10,011.05 (+27.30) Small Cap:2,889.43 (+16.18)

A NASCENT recovery in the banking sector overcame worries about the sector’s exposure to the euro zone fiscal crisis yesterday to help the FTSE 100 off session lows by the close of trade.

The FTSE 100 recovered 45 points to 5,174.25, a rise of 0.9 per cent.

Bargain hunting among banks raised hopes that sentiment towards financial stocks might have turned, helped by reports that Rome was arranging a significant Chinese purchase of Italian bonds.

Although returning worries about Greece’s fiscal position interrupted the rally, it was able to re-establish itself, although analysts predicted further turbulence remained likely.

Barclays added 4.7 per cent to 146.9p. Lloyds Banking gained 4.2 per cent to 31.8p. HSBC was 1.3 per cent stronger at 498.9p and Royal Bank of Scotland retook the top spot on the FTSE 100 with a gain of 5.3 per cent to 21.9p, off session lows of 20.7p.

Cameron Peacock, analyst at IG Markets, said: “All this cheer over an Italian bond buyer does risk looking somewhat exaggerated, especially with the threat of a Greek tragedy still looming, so sustaining the rally without any fresh data points will remain something of a challenge.”

Joshua Raymond, chief market strategist at City Index, remained cautious about the prospects for sustained gains after the volatility.

“First and foremost, investors have no idea what the size of any bond purchase could be, and second, China has bought sovereign bonds before and we still have a huge euro zone debt crisis, so doubts already exist that any deal could make any long-term impact,” he said.

Cairn Energy was the biggest single faller on the FTSE 100 – down 8.2 per cent at 313.9p – after it said its potential oil well off the coast of Greenland contained no crude.

Mitchells Butlers continued to make gains after it rejected a takeover approach from Piedmont, the investment vehicle controlled by Joe Lewis, the Bahamas-based currency trader.

MB, which owns the Harvester and Toby Carvery outlets, said the 230p a share approach – which would value its equity at about £1 billion – “significantly undervalued” the company. The stock gained a further 6.5 per cent to 251p after a 7 per cent rise in the previous session. – (Copyright The Financial Times Limited 2011)