By Francesco Canepa
LONDON (Reuters) - A rally in banking shares helped Britain's FTSE 100 rise to a two-month closing high on Monday as investors welcomed the prospect of lighter rules on leverage for the sector.
Supermarket WM Morrison was the top FTSE gainer on speculation it may sell some property and return some of the proceeds to shareholders, while oil and gas engineering firm Amec was boosted by an expansionary deal to buy rival Foster Wheeler
Banks rallied after regulators, seeking to keep the global economy financed, watered down the rules for calculating how much capital a bank must hold against its loans and other assets.
"It's all about the banks. The relaxing of the regulations is really improving investor sentiment in the sector," said Jonathan Roy, a broker at London Stone Securities.
Banks added 9.2 points to the FTSE 100, which rose 17.21 points, or 0.3 percent, to 6,757.15 points, its highest closing level since November 7.
Barclays rose 2.9 percent, Royal Bank of Scotland was up 3.1 percent and Lloyds up 1.2 percent.
WM Morrison rose 6.4 percent to the top of the FTSE after media reports that, following weaker than expected Christmas sales, the grocer was under pressure from investors to sell part of its property portfolio, freeing up cash to return to shareholders.
"(Property sales worth) 800 million pounds to 1 billion pounds could be a sensible amount," Graham Jones, an analyst at Panmure Gordon & Co, said.
"Then they could do a (share) buyback to offset the earnings dilution from a higher rental cost together with a special dividend."
Volume on Morrison's stock was five times its full-day average for the past three months, compared to volume 5 percent below the average for the FTSE.
AMEC was the second-top gainer, adding 2.4 percent to 1,105 pence, after it agreed to acquire Foster Wheeler, in a deal that it expects will help more than double revenues in growing markets such as Latin America and the Middle East.
Societe Generale described the acquisition as "highly value accretive" and raised its target for Amec to 1,417 pence from 1,320 pence, confirming its "buy" recommendation.
Energy shares tracked crude prices lower as an international deal on Iran's nuclear programme was seen as potentially paving the way for a lifting of sanctions on the country, bringing Iranian oil back onto the global market.
Defensive pharmaceutical and utilities shares also weighed on the market as investors switched into sectors that offer greater exposure to a nascent European economic recovery, such as banks and auto parts.
The FTSE has risen roughly 4 percent in the past six months, compared with an 11 percent increase for the pan-European FTSEurofirst 300, due to the British index's higher weightings in defensive sectors and in shares that depend on commodity prices, which have mostly flatlined or fallen in recent months.
"We see more opportunities in continental Europe," Nick Nelson, a strategist at UBS, said. "We've still got a (FTSE) target of 7,400 for the year but we just think you're going to see better performance when you look across the wider European area."
(Additional Reporting By Toni Vorobyova; Editing by Toby Chopra)