* Banks lifted by M. Stanley, Wells Fargo
* Defensive pharmas fall as risk appetite returns
* LSE under pressure after broker downgrade
By Tricia Wright
LONDON, Oct 21 (Reuters) - Britain's top share index closed 0.3 percent higher on Wednesday, lifted by forecast-beating results from U.S. banks Morgan Stanley and Wells Fargo.
The FTSE 100 closed 14.45 points firmer at 5,257.85, after falling as low as 5,174.48 earlier in the day. It ended 0.7 percent lower on Tuesday.
"You have to turn round and say the Morgan Stanley figure was very helpful," said Stephen Pope, chief global market strategist at Cantor Fitzgerald.
"And you have to look at Yahoo as well as a big contributor in that regard. It just goes to show the pace of this stock market appreciation is not to be denied," he said.
Yahoo on Tuesday reported third-quarter earnings which beat expectations.
The FTSE 100 has surged about 52 percent from a six-year trough in March, though is still about 3 percent below its level in mid-September 2008 before the collapse of Lehman Brothers.
Banks rebounded on better investor sentiment around Morgan Stanley and Wells Fargo. Heavyweight HSBC rose 1.3 percent, while Lloyds Banking Group, Standard Chartered and Barclays put on 0.2 to 1.6 percent.
After the market close, sources familiar with the situation said part of Lloyds' plans to avoid the UK's insurance scheme for bad debts would include 5 to 7 billion pounds ($8-$12 billion) of standby capital raising.
Banks suffered earlier in the day from a call by Bank of England Governor Mervyn King for fundamental banking reform and as sharply higher earnings from Deutsche Bank failed to meet expectations, knocking its stock.
Sterling hit a one-month high against the dollar on Wednesday, adding to broad gains after traders took BofE meeting minutes to suggest that an extension of quantitative easing next month was less likely.
Food retailers were also in favour, led by a 2.3-percent rise in Tesco after Nomura analysts raised their price target on the world's third-biggest retailer.
Positive broker comment also aided real estate issues, with BofA Merrill Lynch upgrading its rating on Hammerson to "buy" and Land Securities to "neutral". Shares in the firms rose 0.6 percent and 2.1 percent, respectively.
The same broker also boosted plumbing supplies group Wolseley with an upgrade to "buy", which helped send its shares up 2.9 percent.
PHARMAS UNDER PRESSURE
Pharmaceutical stocks, perceived as defensive, were under pressure from a rising appetite for risk driven by the latest round of positive U.S. earnings news.
GlaxoSmithKline fell 1 percent, while AstraZeneca shed 0.4 percent.
Miners were mixed, amid a touch of profit taking on a sector which surged 26.5 percent in the last quarter.
Lonmin, Fresnillo, Anglo American and BHP Billiton dropped between 0.1 and 1.8 percent.
BHP Billiton reported near flat quarterly output of iron ore, placing it deeper in the shadow of rival Rio Tinto.
Among individual movers, London Stock Exchange shed 2.2 percent after Goldman Sachs cut its rating on the stock to "neutral" on valuation grounds, and removed it from its Pan-European "conviction buy" list.
BAE Systems, BSkyB and Smiths Group fell after trading ex-dividend.
(Editing by David Cowell)