By Dominic Lau
LONDON (Reuters) - Britain's top share index surged 3.6 percent on Monday as banks jumped after Washington took control of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) to support the U.S. housing market.
By 3:28 a.m. EDT, the FTSE 100 .FTSE was up 186.6 points at 5,427.3 -- on track for its biggest single-day rise since January 24 and recovering some of last week's 7 percent fall, its worst weekly loss in six years.
"It would be nice to think (the rally) will last, but I don't think it will, because the Freddie and Fannie bailout was inevitable. It doesn't really solve the problem," said Jeremy Batstone-Carr, head of private client research at Charles Stanley, adding that the U.S. authorities had run out of options.
"The problem in the funding market remains acute... Once the dust is settled after a day or so, maybe not even, we will be back worrying about the continuing pressure in the funding market, together with the ongoing weakness in the Western economies."
Banks, which have been battered by the global credit crisis, were the top-weighted gainers, adding nearly 80 points to the UK benchmark index.
Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) rose between 5.1 and 13.9 percent.
The bailout of Fannie Mae and Freddie Mac, prompted by worries over the companies' shrinking capital, was the latest in a series of emergency steps taken by U.S. authorities to quell what is now a year-long credit market crisis that has helped push many economies toward recession.
European stocks rose sharply and Asian shares soared, with Tokyo's Nikkei average .N225 up 3.4 percent, while European credit spreads tightened. The dollar, however, fell against the euro. nT215273
Other financial stocks also gained, with Standard Life (SL.L: Quote, Profile, Research, Stock Buzz), Old Mutual (OML.L: Quote, Profile, Research, Stock Buzz), Prudential (PRU.L: Quote, Profile, Research, Stock Buzz) and hedge fund Man Group (EMG.L: Quote, Profile, Research, Stock Buzz) climbing between 3.9 and 6.4 percent.
Energy stocks were also in demand as crude prices traded above $107 a barrel on worries that Hurricane Ike would tear through the Gulf of Mexico.
BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), gas producer BG Group (BG.L: Quote, Profile, Research, Stock Buzz), Cairn Energy (CNE.L: Quote, Profile, Research, Stock Buzz) and Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) advanced between 1.9 and 5.3 percent.
Higher metal prices also boosted mining stocks, with BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz) adding 5.4 percent, Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) putting on 6.5 percent, Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz) gaining 6.5 percent, Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz) rising 5.9 percent and Eurasian Natural Resources (ENRC.L: Quote, Profile, Research, Stock Buzz) up 6.7 percent.
BHP, which announced a final dividend of 41 cents per share, said it was confident in medium term outlook and ability to consistently deliver future earnings and cash flow.
Lonmin (LMI.L: Quote, Profile, Research, Stock Buzz) strengthened 2.6 percent after the Sunday Telegraph reported the miner is exploring a three-way merger with two rivals to create the world's second-biggest platinum company and evade being taken over by rival Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz).
ITV (ITV.L: Quote, Profile, Research, Stock Buzz) climbed 4.3 percent after A board member of Mediaset SpA (MS.MI: Quote, Profile, Research, Stock Buzz), Italy's biggest impendent broadcaster, controlled by the family of Prime Minister Silvio Berlusconi, is looking at a number of possible acquisitions, including the UK broadcaster.
Drugmakers, seen as defensive, sagged, with GlaxoSmithKline (GSK.L: Quote, Profile, Research, Stock Buzz) off 2.9 percent and AstraZeneca (AZN.L: Quote, Profile, Research, Stock Buzz) losing 1.4 percent.
Among mid-caps, DSG International (DSGI.L: Quote, Profile, Research, Stock Buzz) added nearly 5 percent. The electrical goods retailer said on Saturday it was not in talks with bigger rival Metro AG (MEOG.DE: Quote, Profile, Research, Stock Buzz) about a possible takeover by the German firm.
(Additional reporting by Michael Taylor; Editing by Louise Ireland)
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