UK blue chips closed sharply higher with banks rebounding from Wednesday's losses, and Wall Street gaining on better-than-expected earnings and economics news.

At the close, the FTSE 100 index was up 135.7 points, or 2.6 percent, at 5,286.3, having been up as much as 169.9 points earlier. The FTSE 250 index rose 305.2 points to close at 8,719.7.

RBS was the most traded stock, seeing 318 million shares switch owners, followed by Barclays, which saw 192 million units change hands.

In the United States, housing starts and building permits rose in June, although this surprise increase was partly due to a recent change to New York City's building code.

US June housing starts rose 9.1 percent to an annual rate of 1.066 million. Economists polled by Thomson's IFR Markets were expecting starts to drop to an annual rate of 960,000 from the originally reported 975,000 May rate. Commerce upwardly revised that rate to 978,000.

Unemployment data was also not as bad as feared. The Labor Department reported that new applications filed for unemployment insurance last week increased by a seasonally adjusted 18,000 to 366,000, but lower than the 380,000 economists had forecast.

Meanwhile, the four-week moving average of claims, which smoothes out week-to-week fluctuations, dipped.

The number of continued claims for unemployment benefits fell.

Banking giant JP Morgan said second-quarter profit declined 53 percent, but this was ahead of expectations and UK banks benefitted. Merrill Lynch reports after the close of the U.S. market this evening.

As the London markets were closing, U.S. shares, which surged on Wednesday, were up, but off earlier highs, after the Philly Fed July manufacturing index confirmed that sector was still shrinking in the region, albeit at a slower rate.

The Dow Jones Industrial Average was up 36.1 points at 11,275.4, having been up more than 100 points earlier. The S&P 500 was up 2.1 at 1,247.45. The Nasdaq Composite was 1.06 higher at 2,285.91.

David Evans, market analyst at BetOnMarkets.com, said: "The pressure has been on the UK banking sector, but they were pushed down too hard too fast. In the short term at least it looks as though investors are confident that banks have been beaten down well below fair value and are stepping in to pick up some bargains."

Turning to the UK blue chips, Royal Bank of Scotland closed up 14.5 pence -- or 8.8 percent -- at 179.5, having been as high as 179.5.

Barclays took on 23.75 pence to 290.5, Lloyds TSB gained 16.5 to 300.5, and HBOS was 13.75 firmer at 268.25, but still below the 275 pence price of its rights issue, which closes Friday, and is likely to see underwriters left with the shares.

Asian-focused bank Standard Chartered was up 124 -- or 9.2 percent -- at 1,472 and index heavyweight HSBC was up 36.5 at 764.5.

ITV was the day's biggest riser, up 3.8 pence -- or 9.22 percent -- at 45.

On the downside, energy companies were hurt by the slide in crude prices in recent days. Brent for Sept. delivery was trading at 137.19 a barrel late afternoon, up $1.38, but down $10 from last week's highs.

Cairn Energy closed 25 lower at 2,571. Power generator Drax Group, also sensitive to oil prices, was the biggest FTSE 100 faller, down 39.5 -- or 5.24 percent -- at 714.5.