* FTSE 100 up 0.6 percent
* Banks rally after Portuguese debt auction
* M&S leads retailers on update; observers bearish on sector
By Tricia Wright
LONDON, April 6 (Reuters) - Banks helped drive Britain's top shares to a near seven-week high on Wednesday following a Portuguese debt auction, while Marks & Spencer rose on better-than-expected sales, lifting sentiment in retailers.
The FTSE 100 ended up 34.07 points, or 0.6 percent, at 6,041.13, its highest closing level since Feb. 18.
Lex van Dam, hedge fund manager at Hampstead Capital, is bullish on the FTSE 100's prospects in 2011, seeing "an enormous switch out of bonds into equities".
"The big issue at the moment is the worry about inflation and the search for yield, and there's a lot of people who own lots and lots of bonds -- they are starting to get really worried about it because it's just not a great asset class to hold when there's inflation coming in."
Banks were in favour, notching up a 4.1-percent rise this month in the wake of March's 6.2-percent decline, as the sale in Portugal of 6- and 12-month treasury bills brought some temporary relief for a country fighting to avoid a bailout.
But the yield on 12-month T-bills spiked to 5.902 percent from 4.311 percent three weeks ago, and on six-month bills to 5.117 percent from 2.984 percent, highlighting the financial pressure ahead of big redemptions this month and in June.
Lloyds Banking Group led the sector higher, firming 3.9 percent, with traders citing expectations that it will avoid a call for a break-up of its business by the Independent Commission on Banking.
HIGH STREET CHEER?
Marks & Spencer was the standout blue-chip riser, up 6 percent, after beating sales forecasts and winning market share with innovative products like stormproof suits, new food ranges and staples like lingerie.
Sector peers, which endured a torrid time last week on downbeat news from companies including Dixons, Mothercare and John Lewis, found support, with Next the third biggest riser, ahead 3.2 percent.
Jamie Seaton, manager of the 58.7 million pound ($95.97 million) SVG UK Focus Fund, run by SVG Investment Managers, is bearish on the retailers.
"We think there's limited pricing power. The consumer is going through a process of deleveraging, and it's very very hard to see how these (firms), unless in exceptional circumstances, can grow their top-line in this type of environment."
He does however have a small holding in Tesco on account of its dominant position in the retail space and as it is seen as longer-term undervalued.
"Whilst a potential price war is not beneficial to the sector in general, long term the last man standing is said to clean up, so any issues which Tesco might have, Sainsbury/Morrison/ whoever are going to feel it significantly harder and Tesco we believe is the ultimate beneficiary."
Elsewhere, FTSE 100 tour operator TUI Travel and midcap peer Thomas Cook advanced 2.6 percent and 3.2 percent respectively after Citigroup upgraded its ratings on the pair on valuation grounds.
Cairn Energy topped the FTSE 100 fallers' list, off 2.8 percent, as the Indian cabinet further delayed a decision on its sale of a majority stake in Cairn India to Vedanta Resources. Vedanta reversed earlier gains, dropping 0.8 percent.
Pearson and Wolseley both fell after going ex-dividend. ($1=.6116 Pound) (Editing by Jon Loades-Carter)