By Medha Singh
(Reuters) -Domestically focused UK shares jumped about 1% in Thursday's shortened trading session in anticipation that Britain and the European Union would announce a trade pact to avoid a chaotic separation at the end of the year.
The mid-cap FTSE 250 index, considered a proxy to Brexit sentiment, jumped 0.6% to its late February high, while small-cap stocks surged 0.8% to a record high.
Britain's biggest banks, Lloyds Banking Group (LON:LLOY), Barclays (LON:BARC) and Natwest, gained between 2% and 4.5% on high hopes that the long-elusive deal would brighten the country's economic prospects in 2021.
"By removing a major downside risk to the UK economy both in the near-term and long-term, a deal would unlock significant investment in UK and support the recovery once the ongoing coronavirus shock starts to fade," Berenberg economists wrote in a note.
The FTSE 100 however, which includes many companies that earn a large portion of their revenues overseas, gave back most of its gains to end marginally, as the pound's rise weighed on dollar-earners' shares.
Talks to conclude a Brexit trade could still have "some hours to run", a British source said on Thursday, adding that the two sides were still haggling over the EU's right to fish in British waters.
The FTSE 250 closed out the shortened week about 2% higher on hopes that a trade deal would minimise Brexit disruption in 2021, as it also deals with the economic fallout from the coronavirus pandemic.
Tighter restrictions went into effect in parts of Britain this week to tackle the spread of a highly infectious variant of the virus.
The FTSE 100 is down almost 14% this year, on track for its worst year since 2008.
UK markets will remain closed for Christmas on Friday and Boxing Day on Monday.