FTSE rises 2.3 percent on bailout hopes

By Dominic Lau

LONDON (Reuters) - The FTSE 100 ended up 2.3 percent on Friday, led by banks on hopes that the U.S. House of Representatives will give the green light to a $700 billion (396 billion pound) financial sector rescue package.

The FTSE 100 closed 109.9 points higher at 4,980.3 in a volatile session, after falling 0.8 percent earlier. The benchmark index still lost 2.1 percent this week, and is down nearly 23 percent for the year.

Banks were the top-weighted gainers, also boosted by the announcement that the government would guarantee bank savings of up to 50,000 pounds from next week and the sum could be increased again as regulators battle to restore confidence in the financial sector.

Royal Bank of Scotland, Lloyds TSB, Barclays, HBOS and HSBC rose between 5.8 and 10.8 percent, while the FTSE 350 banks index climbed 4.7 percent.

The Bank of England also said it would accept a wider range of collateral, including some triple-A rated corporate and consumer loans, from banks under strain from a lack of cash in funding markets.

London Stock Exchange dropped 2.9 percent after Credit Suisse downgraded its rating for the bourse operator to "neutral" from "outperform." All eyes are on the vote on the $700 billion bailout package at the House of Representatives, which earlier this week rejected an earlier version of the bill, as investors shrugged off an unexpectedly large 159,000 U.S. job losses for September.

"If the vote does go in the positive direction, most of us think it will just about squeeze through, then Monday will be a good day before all the knives come out and the sceptics turn around and say it won't be enough," said Howard Wheeldon, senior strategist at BGC Partners.

The outlook for the economy darkened as a survey showed its services sector contracted at the fastest rate for at least 12 years and bellwether retailer John Lewis reported a plunge in sales.