UK banking stocks rocketed yesterday - driving the FTSE-100 index of leading shares to a near-200-point gain - with HBOS leaping 15% in its biggest-ever one-day advance.

UK banking stocks rocketed yesterday - driving the FTSE-100 index of leading shares to a near-200-point gain - with HBOS leaping 15% in its biggest-ever one-day advance.

Bank of Scotland parent HBOS, which was hammered last week by rumours about funding difficulties which chief executive Andy Hornby denied categorically, last night welcomed the jump in its shares but highlighted the influence of stock market volatility.

The London stock market, reopening after a four-day Easter break, leapt from the outset, helped by strength on Wall Street last Thursday night and on Easter Monday New York's Dow Jones Industrial Average, which finished last Thursday with a 261.66-point gain, jumped a further 187.32 points on Monday. Sentiment was boosted on Monday when US investment bank JP Morgan Chase hiked its offer for embattled Wall Street rival Bear Stearns from $2-a-share to $10-a-share in the face of intense pressure from investors in its bid target.

The Dow was softer for a while yesterday but had, by the session-end, largely shaken off separate reports showing US consumer confidence fell to a five-year low in March and signalling American house prices in January were 11% lower than a year earlier. It finished down only 16.04 points at 12,532.60, having touched an intra-day low of 12,449.08.

In London, the FTSE-100 rose 193.9 points to 5689.1 as banks rebounded.

Banking shares have been hammered in recent times amid the global credit crunch, which has its roots in massive default on home loans by US households with poorer credit ratings served by the sub-prime mortgage sector.

Royal Bank of Scotland shares jumped 30p - more than 9% - to 351.25p. Barclays climbed 30p, or 7%, to 459p. Lloyds TSB gained 27.5p - more than 6% - to 461.5p.

Shares in HBOS, which were hammered down by 17% at one stage last Wednesday before recovering ground to finish that session off about 7%, rocketed by 70.75p or 14.93%, to 544.5p yesterday.

A spokesman for HBOS noted yesterday's jump was the biggest single-day percentage rise in the bank's shares since it was formed by the merger of Bank of Scotland and Halifax in September 2001. The previous record was a 10% advance on July 25 2002.

The HBOS spokesman said: "We are pleased with today's share-price movement but we have no illusion about the significant volatility affecting stock markets right now. Our job is simply to keep focused on the business and delivering for shareholders."

HBOS reiterated yesterday that it would provide an account of its "understanding of what happened", regarding the unusual activity around its shares last Wednesday, to the Financial Services Authority. The UK regulator said last Wednesday it would investigate the spreading of rumours and any associated trading.

Sandy Nairn, chief executive of fund manager Edinburgh Partners, yesterday said recent sharp falls in banking shares meant they now looked a better risk-reward proposition than other sectors. He emphasised this was the case even if some banks had to raise capital through rights issues.

Nairn told The Herald: "I would say, on a valuation basis, the financial sector is a better risk-reward than many other sectors now. We have had share prices down substantially. There will be a number of banks probably having to have rights issues. Even if they have rights issues, on a long-term view, the risk-reward is okay on them."

He added: "I think there is more bad news discounted in the banking sector (share prices) than there (is) in other sectors. The bad news will happen. It is not that it is wrong to do that. There are other sectors where I think I would be more concerned." Nairn said, for a range of companies from industrials to retailers, expectations of future profit margins were "way too high".

He declared current problems would not be contained within the banking sector but would be a more general issue.

Nairn said: "The ripples go much wider. What you may well find is, as banks are rebuilding their balance sheets, everyone else is suffering. They (banks) are going to be pricing risk differently. The people on the other side of that repricing are going to be suffering - whether it is consumer debt or corporate debt. The banks have to make bigger profit margins."

Nairn said Edinburgh Partners had been buying banking shares "a little bit" recently.

He added: "I am not denying there is a whole series of risks - some of which we don't know about. You have now got to the stage where some say, Never own a bank'. That is an odd thing to say."

Nairn said Edinburgh Partners had been investing in "a mixture" of banks, noting there may be things about a particular institution which a fund manager or even the bank itself "may not know".

He added: "What you are trying to do is spread your risk...I don't think the solvency of a UK clearing bank is under threat. Could any one of them have to have a rights issue? That is possible. Are they going to disappear? No. I don't see it."

Asked about HBOS's valuation, he declined to comment on an individual stock.

However, in the context of last Wednesday's tumble in the share price, Nairn said: "My feeling is that if someone wants to sell something short and depress the price unrealistically, the only reaction to that is to buy it. Don't go in a huff because they made it cheap. Just buy it."

Even as banking stocks surged yesterday, credit market conditions tightened further.

The British Bankers' Association's London Interbank Offered Rate for three-month sterling jumped for an eleventh consecutive session, from 5.9875% last Thursday to a fresh 2008 high of 5.995%.

Banks and building societies have been withdrawing mortgage products as credit conditions have remained tight and amid signs of a softer UK housing market.

Dunfermline Building Society said yesterday it was withdrawing its mortgage products offering 100% or more in loan-to-value, and revealed it had seen a rush of applications as rivals had withdrawn their offerings in this segment.

Dunfermline said: "As expected, with being only one of a few lenders in the high loan-to-value marketplace, we have received a large inflow of mortgage applications for 100%-plus products over the last few weeks.

"This has meant we have achieved our current quota in this area and therefore it is prudent for us to withdraw this range at present."