FTSE Maintains Rally As Vodafone, Oils Gain

`The gut feeling is that that maybe markets were over-doing the gloom towards the end of last year,` said Peter Dixon, UK economist.

Britain's leading share index gained 0.4 percent on Monday, adding to its post-Christmas rally, with Vodafone in demand, and oils firmer, outweighing a fall in defensive pharmaceutical and tobacco stocks.

The FTSE 100 ended 17.85 points higher at 4,579.64, its highest close in two months, after rising 8.2 percent in a four-session winning run last week.

The UK benchmark last year suffered its biggest annual drop since its launch in 1984, falling 31 percent.

Index heavyweight Vodafone provided the biggest boost for the FTSE 100 index on Monday, up 4.4 percent, extending its recent strong run to reach its highest since September after Credit Suisse tagged the mobile phone group as a "trading buy" on Dec. 31.

"The gut feeling is that that maybe markets were over-doing the gloom towards the end of last year," said Peter Dixon, UK economist at Commerzbank.

"They are testing the upside a little to see if there's any substance to whether stocks were oversold, but there's lots of scepticism, which I share, about whether (the rally) is sustainable."

Oil stocks also moved higher as crude prices pushed back above $47 a barrel, lifted by concern about Israel's offensive in the Gaza Strip and the Russian gas supply row.

BG Group, BP, Cairn Energy, and Tullow Oil added between 1.3 and 4.1 percent.

Markets shrugged off concerns about war in the Middle East as the prospect of tax cuts in Germany and a slightly better- than-forecast survey of euro zone investor sentiment eased anxiety.

U.S. President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a massive stimulus plan to tackle the financial crisis.

MIXED BANKS

Banks were mixed, with HBOS sliding 9.2 percent and Lloyds TSB easing 3.3 percent but Barclays gained 2.6 percent and Standard Chartered added 6.2 percent.

Deutsche Bank said in a note that it had cut its 2009 EPS forecasts for Barclays, HSBC, RBS and StanChart by 12 to 72 percent.

"Considering the fact that most of the banking sector's losses relate to the US and domestic housing market, it is perhaps unsurprising that the financial sector is still mired with problems," said David Evans, market analyst at BetOnMarkets.com.

Retailers were mixed with a of spate of Christmas trading updates due this week.

High street bellwether John Lewis set the tone announcing like-for-like sales excluding VAT at its department stores were flat for the five weeks to Jan. 3, compared with the same period last year, with managing director Andy Street saying he expected the next few months to be "extremely tough".

Marks & Spencer rallied 4.1 percent ahead of Wednesday's trading update, while mid-cap Debenhams gained 11.8 percent ahead of its update due on Tuesday.

However, Next lost 1.6 percent, with its update expected Tuesday, and food retailer Sainsbury was down 4.2 percent ahead of trading news on Thursday.

Defensive stocks, which tend to underperform as markets rise, were among the heaviest losers. Pharmaceuticals giant Astrazeneca shed 3.4 percent while Imperial Tobacco slid 2.3 percent.

The ailing domestic economy has prompted the Bank of England to slash interest rates to 2 percent from above 5.75 percent in July, and a Reuters poll of economists forecast it will cut rates another 50 basis points to a record low when it meets on Thursday.