* FTSE 100 up 1.2 percent to new 4-month closing high
* Banks rise, helped by easing concerns over Basel III
* Home Retail tops FTSE 100 fallers after trading update
By Dominic Lau
LONDON, Sept 9 (Reuters) - Britain's top share index rose sharply on Thursday to post a four-month closing high, as U.S. weekly jobless claims fell more than expected and further eased concerns of the United States falling back into recession.
Economy-sensitive banks were among the top gainers, up 2.3 percent, also aided by expectations that the new Basel III capital rules, expected to be detailed on Sunday, will not be as tough as feared.
Barclays soared 5 percent, recovering the previous two sessions' losses following the appointment of Bob Diamond, the head of its investment and wealth management business, as its new group chief executive, while Royal Bank of Scotland advanced 5.1 percent.
Lloyds Banking Group added 3.3 percent after agreeing to sell its stake in housebuilder Crest Nicholson to U.S. investment company Varde. It was also boosted by an upgrade by Barclays Capital.
The FTSE 100 closed 64.42 points, or 1.2 percent, higher at 5,494.16 points, and volumes were 85 percent of its 90-day daily average.
European shares also finished the day higher.
"The key will be does the macro data in the next two or three weeks continue to be decent in the U.S.? If it does, does it give us the impetus to break out of the topside? If we do that, volumes will accelerate," said Nick Nelson, equity strategist at UBS.
UBS expects there will be no double-dip recession in the U.S. and has a year-end target of 6,000 for the UK blue chip index, a 9.2 percent upside from Thursday's closing level.
New U.S. claims for unemployment benefits fell more than expected last week to a two-month low, while the trade deficit narrowed sharply in July, hopeful signs for the stuttering economic recovery.
Sentiment was also aided by comments from European Central Bank Governing Council member Yves Mersch that the euro zone is on the brink of a sustainable recovery.
In the UK, the Bank of England (BoE) kept interest rates at 0.5 percent for the 18th month in a row and announced no new quantitative easing purchases, in a widely expected decision.
"Both the U.S. Federal Reserve and the BoE would not be prepared to tolerate any loss of momentum in their respective economies," said Mike Lenhoff, chief strategist at Brewin Dolphin, commenting on the likelihood of the BoE extending its quantitative easing programme.
The FTSE 100 volatility index slipped 2.5 percent, hitting a three-week low and indicating a firmer appetite for risk.
STRONG ARM
Chip designer ARM Holdings climbed 4 percent after it unveiled a new low-power processor for next-generation smartphones, mobile computing servers and wireless networking.
The stock has surged 127 percent this year, boosted by strong demand for smartphones, netbooks and tablet computers, as well as M&A talk.
Home Retail shed 2.8 percent after Britain's number one household goods retailer lowered guidance for full-year profit.
UK general retailers carried a 12-month forward price-to-earnings of 9.8 times, slightly more than expensive than FTSE 100's 9.6, Thomson Reuters Datastream showed. (Editing by Sharon Lindores)