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The UK banking index .FTNMX8350 surged 6.1 percent, the biggest one-day percentage gain in more than four years, helping the FTSE 100 index .FTSE to close 2.5 percent higher. The gains came after the index dropped nearly 3 percent in the previous two sessions.
Lloyds rose 13.6 percent after it reported a rise in profits and said it would pay a special dividend of 0.5 pence a share, demonstrating its recovery from the financial crisis. Lloyds had to be bailed out in 2009, and the government ended up owning a 43 percent stake in the bank.
The government has gradually sold off shares, reducing it stake to around 9 percent. But last month, it postponed plans to sell more of its stake in the bank because of market volatility.
"After today’s strong rise, the price of Lloyds is hovering close to the government’s break-even price," said Laith Khalaf, senior analyst at Hargreaves Lansdown, but we doubt the Chancellor will bring the public sale back to the table while the Brexit vote threatens to destabilise financial markets."
Insurer RSA rose nearly 10 percent after it posted a 43 percent increase in operating profit to 523 million pounds ($728.33 million) for 2015. Analysts in a company-supplied forecast had expected an operating pre-tax profit of 481 million pounds .
Telecom group BT (BT.L) rose 4.7 percent after Ofcom said the company should be overhauled rather than split up, as some rivals had been calling for.
"Relief that telecoms regulator Ofcom will not force BT to split from its Openreach division helped shares ... It will, however, be forced to open up its cable network further to competitors, which could be damaging to its dominant position in the market," said Jasper Lawler, an analyst at CMC Markets.
Among mid-caps, outsourcer Serco (SRP.L) rose 15.5 percent after in-line results, with some traders saying that its net debt position had improved.
Editing by Larry King