By Alistair Smout and Kit Rees
LONDON (Reuters) - UK shares advanced on Monday as mining companies buoyed by strengthening metals prices outweighed worries over Britain's potential exit from the European Union and a drop for banking heavyweight HSBC (L:HSBA).
Britain's FTSE 100 index (FTSE) rose 1.5 percent to close at 6,037.73 points while the FTSE 350 mining index (FTNMX1770) hit its highest level since November 2015.
It was up 8 percent, with Anglo American (L:AAL), BHP Billiton (L:BLT), Rio Tinto (L:RIO) and Glencore (L:GLEN) gaining between 8.4 percent and 11.8 percent as the price of copper climbed to a two-week high.
Investment bank Jefferies raised its target price on Anglo American, which has gained more than 60 percent this year, but retained its "underperform" rating on the stock.
Bets on future falls for some mining companies, known as shorting, have risen to multi-year highs. This can indicate future volatility, but it can also spur gains as investors call off their bearish positions.
"A lot of what is going on is a short-covering rally, so it's not a coinicidence that miners have done the best," CMC Markets analyst Jasper Lawler said.
"I believe that we've hit pretty much the bottom in the mining sector, so long as we don't make new lows in metals prices. And international sectors like the miners will be less-exposed to a Brexit."
Gains in such sectors were enough to outweigh uncertainties over the impact of Britain's vote on EU membership, set for June 23 after Prime Minister David Cameron agreed a new deal with EU leaders on Saturday.
STERLING SLIDE
The top fallers on the index were property stocks, viewed as one of the domestic sectors most exposed to a possible Brexit. Berkeley (L:BKGH), Taylor Wimpey (L:TW), Persimmon (L:PSN) and Barratt Developments (L:BDEV) all fell by more than 4 percent.
The pound
A weaker pound actually benefits many stocks on the blue-chip FTSE 100 (FTSE), which has substantial international exposure.
JP Morgan upgraded UK equities to "overweight" from "underweight", a position it had held for three years, despite the risk of Brexit.
"The JPM base case is that UK stays in Europe, but admittedly it is likely to be a close call. Once the campaigning starts in earnest, we believe that the bulk of businesses will fall in the 'stay' camp," JP Morgan analysts said in a note.
"In the event of UK leaving, the initial knee-jerk impact on the market could be quite negative, but we believe the resulting GBP weakness and BoE action will cushion a chunk of the fall in equities."
British stocks underperformed European equities on Monday, with more domestically exposed mid-cap (FTMC) and small-cap (FTSC) indexes lagging further behind, up only 0.8 percent and 1.2 percent respectively.
HSBC closed down 0.8 percent after an underwhelming set of results for 2015 and its confirmation that it is being investigated by U.S. regulators in relation to the hiring of people with ties to government officials in Asia.