By Helen Reid
LONDON (Reuters) - Britain's leading shares made strong gains on Tuesday, supported by Rolls Royce and oil major BP among a raft of robust results, while a recovery in cigarette makers British American Tobacco and Imperial removed a drag on the benchmark.
The FTSE 100 (FTSE) jumped 0.7 percent, starting the month on a firm footing, while mid-caps rose 0.4 percent.
Shares in engine maker Rolls Royce (L:RR) rocketed up 10.2 percent, their best day in a year, after a solid first half which saw profits rise more than expected as it delivered a 27 percent increase in large civil aerospace engines.
Shares in BP (L:BP) jumped 2.4 percent after the firm beat profit expectations for the second quarter.
"BP's 37 percent beat versus consensus (3 percent versus UBS estimates) was driven by a very strong result in the Upstream, part offset by weaker earnings in the Downstream," said UBS analysts.
"BP had pre-announced the $750 million exploration write-off related to Angola but the remaining charge was lighter than forecast," they added.
Tobacco stocks BAT (L:BATS) and Imperial Brands (L:IMB) rose 2.5 and 2.7 percent respectively after sharp losses in the two previous sessions as investors digested a U.S. regulatory clampdown on the amount of nicotine in cigarette products.
BAT overtook BP as the biggest single contributor to large-cap gains, adding 10.6 point to the FTSE 100.
Although BP kept its dividend flat at 10 cents per share, some investors fretted about possible threats to the British market's strong dividend yield.
"What happens if tobacco profits are regulated to a fraction of their current levels and the oil companies have to ramp up their investment into renewables?" mused Jim Wood-Smith, head of research at Hawksmoor Investment Management.
"None of this may happen, but for those relying on investment income, it is a kick up the backside that it must be properly diversified. Cuts in tobacco and oil dividends may well come and we have all been warned," he added.
Testing firm Intertek (L:ITRK) jumped 8.8 percent after reporting a 21.9 percent rise in first-half profit, helped by the fall in sterling.
Earnings from Centrica (LON:CNA) sent the stock up 2.3 percent as Britain's largest energy supplier announced an increase to its electricity prices despite losing another 485,000 customers since May.
Insurers also contributed to gains, with shares in Direct Line (L:DLGD), Britain's largest motor insurer, up 5.4 percent after the firm reported a 9.5 percent rise in first-half profit, helped by strength in auto insurance premiums.
Fresnillo (L:FRES) was the worst-performing of just a handful of fallers, down 2.6 percent despite reporting a doubling of profit for the first half.
Analysts at Shore Capital pointed to a strong balance sheet but a "relatively paltry" interim dividend. "Stronger second half should see a more generous final dividend, we think," they wrote in a note.
A late laggard was roadside recovery and motor insurance company AA (L:AAAA) which fell 13 percent to a record low, weighing on mid-caps, after Executive Chairman Bob Mackenzie was fired for gross misconduct. The firm also lowered its full-year forecasts.
"Some of the key metrics are generally encouraging, although that may be lost today," said Liberum analysts. "The transformation may have taken longer but there is tangible evidence of improvement."
Mid-cap lender CYBG (L:CYBGC) gained 9.1 percent, the top boost to European banks after confirming its full-year targets, and saying costs for the full year would be at least 10 million pounds lower than previously thought.
Shares in hedge fund Man Group (L:EMG) climbed 4.4 percent, putting the stock among the best-performing in Europe and helping financial services outperform, after assets under management rose 19 percent in the first half.