Britain's FTSE 100 <.FTSE> ended up 0.2 percent after hitting earlier in the session a three-week high. A measure of volatility on the blue-chip index <.VFTSE> hit a four-month high, though it remains near historically low levels.

"We still feel that the general context, even now, is that equity markets are probably pricing in too much bad news," said Kevin Gardiner, global investment strategist at Rothschild Private Wealth. "We think the economic backdrop is less fragile than people have felt, and we are expecting markets to outperform."

The blue-chip index was little changed after statistics showed UK inflation held steady in March because of the later Easter holidays and a dip in global oil prices, although the squeeze on household spending looked set to resume soon.

Retail sales figures published earlier showed British shoppers clamped down on spending as the cost of essentials rose.

"Hedging has so far shielded UK non-food retailers and consumers from imported cost inflation," said HSBC analysts.

Randgold Resources (>> Randgold Resources Limited), Rio Tinto (>> Rio Tinto plc) and Fresnillo (>> Fresnillo Plc) were among top blue-chip gainers.

International Consolidated Air (>> International Consolidated Airlns Grp SA) and EasyJet (>> easyJet plc) were up 1.9 and 2.1 percent, gaining after broker Exane upgraded its view on their German rival Lufthansa (>> Deutsche Lufthansa AG).

"We firmly stand by our view that European and global demand will remain stubbornly strong, notwithstanding the potential impact of geopolitical events," the Exane analysts wrote.

Burberry (>> Burberry Group plc) inched up 0.4 percent after the world's biggest luxury goods group LVMH (>> LVMH) beat expectations for its first-quarter sales.

Britain's mid-caps <.FTMC> and small-caps <.FTSC> climbed to record highs, both up 0.2 percent, driven by results and broker upgrades.

Construction and support services company Balfour Beatty (>> Balfour Beatty plc) rose 5.8 percent after Bank of America Merrill Lynch upgraded the stock to "buy" on its improved confidence in margin recovery in its key markets.

Retailer JD Sports (>> JD Sports Fashion PLC) was the top mid-cap gainer, rising 8.2 percent to a record high after strong demand for leisure clothing drove a 55 percent rise in pretax profit, its biggest increase in eight years.

Shares in small-cap radio communications firm Sepura (>> Sepura Plc) dropped 7.7 percent after the Competition and Markets Authority said it was investigating the anticipated acquisition of the firm by Chinese radio company Hytera (>> Hytera Communications Corp Ltd).

(Reporting by Helen Reid; Editing by Larry King)

By Helen Reid