Diageo, Shell boost Britain's FTSE to near 3-week high

London's blue-chip stocks bagged gains for a third consecutive session on Thursday as stellar earnings from Shell and Diageo helped cushion losses in banks and growing concerns over Europe's economic health.

The FTSE 100 added 0.4 percent after earlier hitting its highest level in nearly three weeks, while the midcap index  handed back earlier gains to close 0.6 percent lower.

A positive tone was initially set with Asian shares bouncing to a four-month high after the Federal Reserve pledged it will be patient with further interest rate hikes, signalling a potential end to its tightening cycle amid signs of slowing global growth.

The blue chips handily outperformed their European peers on Thursday and were on course for their best monthly performance since April.

But UK markets saw some of that cheer fade as weakness from Europe spilled over with data showing that the euro zone economy stuck to its lowest pace of growth in four years in 2018's last three months.

On the other hand, uncertainties mounted for Britain with the European Union's chief Brexit negotiator saying that time was too short to find an alternative to the Irish border arrangement agreed in their divorce deal, as London wants.

Topping the FTSE 100, Diageo, the world's largest spirits company, jumped 4.7 percent to a record high after it reported higher half-year sales and announced a share buyback.

Oil major Shell, the highest valued FTSE 100 firm, was close behind after it reported a forecast-beating 36-percent surge in 2018 profits as cost savings kicked in.

That helped oil stocks climb 3 percent and notch their biggest intra-day gain in three months.

Water utilities Severn Trent and United Utilities  advanced 2.5 percent and 1.3 percent respectively after regulator Ofwat approved their five-year business plans.

But investors shunned the banking sector after a Bloomberg report that Deutsche Bank was expecting a merger with rival Commerzbank if efforts to restructure fall short of targets.

"You take two banks which are struggling and have been really underperforming in comparison to their British or American counterparts and you consider shoving them together just to take pressure away from it ..."

"... two weak banks doesn't give you one larger strong bank," CMC Markets analyst David Madden said.

The report dragged down shares in Deutsche Bank and Commerzbank, as well as British banks that dipped nearly 2 percent to their worst day since early December.

The so called "Big Five" lenders - HSBC, Barclays , Lloyds, Standard Chartered and Royal Bank of Scotland - all lost big on the main index.

Mid-cap Metro Bank plunged 11 percent to a new record low after the lender said Britain's Prudential Regulation Authority had first discovered "potential inconsistencies" on its books, rather than Metro discovering the mistakes independently.

Some other notable fallers were telecoms giant BT and Unilever, while asset manager Standard Life Aberdeen  tumbled 5 percent after a downgrade by Morgan Stanley to "equal-weight".

"In 2019 we expect market conditions to remain challenging," Unilever's new chief executive Alan Jope said.

RPC rose 4 percent, biggest support to the midcap index, after U.S.-based Berry Global said it was considering an offer for the packaging firm following Apollo Global Management's 3.3 billion pounds ($4.33 billion) deal.

"What a difference a month makes, from the doom and gloom of December, January looks set to see some decent gains as investors look at the latest earnings numbers," said CMC Markets analyst Michael Hewson.