Stimulus focus drives gains by FTSE

A trader holds a phone while checking screen data at the IG Index trading floor in London, December 9, 2011.

LONDON (Reuters) - Shares extended gains on Monday, led by rallies in banking and commodity stocks, with the market primed for fresh economic stimulus moves later this week, building on measures agreed by an EU summit to counter the euro zone debt crisis.

But some commentators were more pessimistic on the market outlook, feeling that with uncertainties still hanging over the euro zone deal, any disappointment on the detail of the new measures could trigger a sell-off.

"I suppose a bit of momentum coming in from the summit on Friday, which I assume is the positive tone in the market today. That could change when we get more details about how it is going to work out, because at the moment there are a lot of open questions," said Peter Dixon, the UK economist at Commerzbank in London.

"I don't know when it will turn around but I am pretty sure that there is a lot of uncertainty out there...I think we should not get too carried away about the outlook for stocks in this environment," he added.

The FTSE 100 .FTSE closed 69.49 points higher, or up 1.25 percent, at 5,641 level. The UK blue chip index jumped 1.4 percent on Friday.

Volumes were relatively thin, at 74 percent of the 90-day daily average, way below the level seen last Friday, showing sluggish trading activities as investors are still cautiously positioned in a market that still requires a solid driver.

Financial stocks .FTNMX8350 were in demand, supported by Friday's euro zone news given the sector's direct exposure to the bloc's sovereign bonds, with insurer Aviva (AV.L) the top blue chip gainer, up 3.7 percent.

The rise came ahead of an investor meeting for Aviva due on Thursday, at which it is widely expected to unveil a series of key announcements, such as cost cutting, and the disposal of its U.S. operation.

Barclays (BARC.L) rallied 3.4 percent after having suffered a 17 percent slump in the past three days over a Libor-fixing scandal that cost Chairman Marcus Agius his job on Monday.

Uncertainty, however, remained over the future of its Chief Executive Bob Diamond after Barclays was last week fined $453 million by British and U.S. regulators for submitting inaccurate submissions on the Libor interest rate.

Energy stocks .FTNMX0530 and miners (.FTNMX1770> were the top performing blue chip sectors, holding up on stimulus hopes although commodity prices fell back on some disappointing data.

The U.S. manufacturing sector grew at its slowest pace in June for 18 months, underlying the shrinking demand for U.S. goods from European countries, mired in the debt crisis.

Manufacturing data also disappointed from Britain and China on Monday. Britain's Markit/CIPS manufacturing index rose to 48.6 in June, up from 45.9, better than forecast but still below the 50 mark dividing growth from contraction.

STIMULUS SOUGHT

Traders said although the data was disappointing, it should reinforce the case for central banks to unveil further pro-growth measures and give a boost to market sentiment.

The Bank of England Monetary Policy Committee meets on Thursday and it is also expected to make fresh stimulus moves by raising the amount of its quantitative easing policy in an attempt to revive the flagging British economy.

The main market focus, however, was on a European Central Bank meeting on Thursday, with many economists expecting a cut in interest rates to 0.75 percent from 1.0 percent, as a follow-through action to the EU summit measures, which should further boost equities.

Strategists at JPMorgan remained sceptical. They said that while clear positives have emerged from last week's EU summit on tackling the euro zone debt crisis, drivers of a sustained rally are still missing, with weakening global macro momentum among headwinds impeding further gains.

"Overall, we think markets will remain under pressure over the next months. We do not believe that the backdrop of "things need to get worse before they can get better" has gone away. We would wait for either a stabilization in PMIs or a more aggressive German/Chinese policy action before adding back risk," JPMorgan said in a note.

(Reporting by Jon Hopkins and Aileen Wang, editing by Diana Abdallah)