Banks lifted Britain's top shares on Thursday, with Royal Bank of Scotland and Lloyds Banking Group top performers on reports that a new bid vehicle will seek to buy British banking assets.

The FTSE 100 .FTSE index was up 90.63 points, or 1.8 percent, at 5,105.45, rising for a third consecutive day. It closed up 49.82 points, or 1 percent, on Wednesday.

Banks were among the biggest gainers, led by state-backed Lloyds Banking Group (LLOY.L) and Royal Bank of Scotland (RBS.L), up 4.3 and 4.0 percent respectively after reports that two senior British banking figures have joined forces to back a new bid vehicle which will list on the London stock market and look to purchase British banking assets.

Lloyds was also helped by a Bank of America Merrill Lynch note, which reiterated its stance that the Lloyds share price would double over the next two years.

Fears over the bank sector's exposure to Europe's sovereign debt crisis were also soothed as European supervisors shored up some confidence in the stress tests they are imposing on lenders.

A number of factors have combined to improve risk appetite over the past few days, said Michael Hewson, analyst at CMC Markets.

As far as the UK is concerned there is little concern about UK banks as they have already passed much more stringent tests, which had been previously done by the UK authorities some time ago.

Meanwhile, Credit Suisse raised its weighting on European banks to benchmark from 10 percent underweight in a global equity strategy note on Wednesday.

Adding to bullish sentiment, U.S. peer State Street (STT.N) said on Wednesday its quarterly operating earnings would easily top Wall Street forecasts.

The International Monetary Fund on Thursday upgraded its 2010 global growth forecast on the back of robust growth in Asia and renewed U.S. private demand. But it also flagged big risks to the recovery from Europe's debt problems.

Neither the Bank of England nor the European Central Bank made changes to monetary policy on Thursday, as was expected.

OILS RALLY

Better-than-anticipated job data from the United States added fuel to the demand for integrated oil stocks and helped boost the crude price CLc1. Royal Dutch Shell (RDSa.L) added 3.7 percent and BG Group (BG.L) climbed 1.0 percent.

New U.S. claims for unemployment benefits fell more than expected last week to their lowest level in two months, offering cautious hope for the economic recovery that had shown signs of fatigue.

BP (BP.L) rose 1.3 percent after boss Tony Hayward met with Abu Dhabi Investment Authority, a state investment fund, on Wednesday, part of a quest for cash to ward off takeovers and help pay for the worst oil spill in U.S. history.

Miners made ground as risk appetite improved, with Xstrata (XTA.L) leading the sector higher, up 2.9 percent, supported by an upgrade to hold from sell by Panmure Gordon.

Among individual gainers, Aggreko (AGGK.L) was the top riser on the FTSE 100, up 5.7 percent, with traders citing an HSBC note which initiated the temporary power supplier with an overweight rating, and vague talk of bid interest.

ARM Holdings (ARM.L) put on 3.5 percent after Panmure Gordon materially raised its earnings forecasts for the chipmaker by up to 30 percent.

Intertek Group (ITRK.L) gained 3.6 percent as Exane BNP Paribas raised its rating to outperform from neutral.

On the downside, J Sainsbury (SBRY.L) fell 1.0 percent, after Chief Executive Justin King sold shares in Britain's third-biggest grocer, dampening speculation of a fresh bid. (Editing by David Cowell)

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