March 21 (Reuters) - London stocks gained over 1% on Tuesday, with lenders rebounding on easing fears of a bigger banking crisis, while investors awaited the U.S. Federal Reserve's interest rate decision.
The FTSE 100 (.FTSE) jumped 1.8%, its best day in over four months, while the mid-cap FTSE 250 (.FTMC) added 1.5%.
Fears of a global banking meltdown looked to ease after Swiss lender UBS (UBSG.S) agreed to buy its beleaguered rival Credit Suisse (CSGN.S) for $3.23 billion over the weekend.
"Investors at this point feel comforted with how this mini banking crisis is being handled," said Craig Erlam, senior market analyst at Oanda.
British banks (.FTNMX301010) climbed 3.3% with the sector index recording its best daily percentage in over two months, with Barclays (BARC.L) leading the pack, rising 5.0%.
A weak pound , down 0.7%, also aided the exporter-heavy FTSE 100.
Oil majors BP (BP.L) and Shell (SHEL.L) rose nearly 3% each as oil prices gained.
Meanwhile, precious metal miners (.FTNMX551030) dropped 4.4% tracking the weakness in spot gold prices.
Investor focus now shifts to the outcome of the Fed's two-day policy meet on Wednesday, with traders widely betting on a 25-basis-point increase.
The FTSE 100 is up 1.1% for the year, after erasing its yearly gains in the previous session, with receding concerns around a contagion within the global banking space
Markets also awaited the February UK inflation data due Wednesday ahead of the Bank of England's monetary policy decision on Thursday.
"We've seen interest rates rise pretty quickly and we know the monetary policy acts with a lag," said Richard Flax, chief investment officer at Moneyfarm.
"It would seem reasonable for the Bank of England to potentially hike this week and then take stock of what impact their policy has had."
Investors will also watch out for Finance Minister Jeremy Hunt's remarks as he speaks to the Economic Affairs Committee later in the day after delivering his budget last week.
Among other major movers, Kingfisher (KGF.L) fell 1.5%, reversing earlier gains after the home improvement retailer forecast a further fall in profit this year after it plunged 20% in 2022-23.
