* FTSE up 1.5 percent, back to pre-Japan disaster levels
* Retailers buoyed by Kingfisher, Next results
* Barclays prefers developed market equities
* Poll sees FTSE 8 percent higher by end 2011
By David Brett
LONDON, March 24 (Reuters) - Retailers were among the top performers in a rally in Britain's top share index on Thursday, which took the FTSE 100 back to levels last seen just before the earthquake in Japan.
Results from Kingfisher and Next showed how some retailers can overcome tough trading conditions in the UK.
Kingfisher, which hiked its dividend and reported a 23 percent rise in full-year profit, rose 7.2 percent as Deutsche Bank said it was its top pick among general retailers.
Deutsche Bank said it expected general retailers to outperform as household spending growth exceeds expectations in second-half 2011, despite current weak consumer indicators.
Britain's retail sales fell more than expected in February, hit by the biggest jump in prices in 17 years.
"This presents a buying opportunity," Deutsche Bank said.
"Consumer spending forecasts have already been revised down to reflect the fiscal pressures and higher oil prices."
The bank estimated a 1 percent increase in interest rates should take a modest 0.2 percent off household income, adjusting for the impact of rate hikes on interest income.
Deutsche Bank also said Marks & Spencer, up 3.7 percent, "could provide insulation against rising interest rates given its market share across the older demographic".
Next added 4.0 percent in response to the fashion retailer's growth forecasts.
The blue chip index rallied 84.99 points, or 1.5 percent, to 5,880.87, also boosted by a rush for energy and mining stocks as investors focused on reconstruction opportunities in Japan.
"The final outcome of Japan's disaster is unknown but any impact from a slowdown in consumer driven growth will be offset by the need to rebuild in the region," Jimmy Yates, head of equities at CMC Markets said.
DEVELOPED OVER DEVLOPING
Larry Kantor, head of research at Barclays Capital, said in a note he generally favoured equities over bonds, and developed market equities over emerging market stocks.
"We favour developed market equities because there is more room for economic growth without triggering significant policy tightening."
"The corrections following the dramatic events of recent weeks have created attractive entry points."
A Reuters poll of 27 strategists forecast that Britain's top share index is set to gain around 8 percent to December as the threats to the economic recovery subside.
Banks joined the rally, brushing aside European debt concerns after ratings agencies Fitch and Moody's downgraded their debt ratings on Portugal and 30 Spanish banks respectively.
Barclays rose 1.3 percent, helped by Credit Suisse repeating its "outperform" rating on the stock in a note on European banks.
On the downside, Invensys fell 4.5 percent after the British engineer ousted its chief executive Ulf Henriksson.
"I guess (Henriksson's departure) takes some of the edge off bid speculation," a London-based trader said, referring to suggestions by Henriksson in November that China Southern Rail could buy a stake.
Imperial Tobacco shed 0.6 percent, as the world's fourth biggest cigarette maker reported slowing growth in the first-quarter of 2011.
Cable & Wireless Worldwide plunged 14.4 percent after downgrading expectations for core earnings next year.
(Editing by Jane Merriman)