DUBAI/CAIRO, (Reuters) – Saudi petrochemical and banking stocks helped the index hit a new three-and-a-half year high on Wednesday on increased interest in local equities, as most Gulf markets while Egypt declined for a second day.

The kingdom’s benchmark climbed 0.9 percent to 7,031 points, its highest close since October 2008, with 7,000 seen by analysts as a key hurdle to overcome by the largest Arab bourse.

Heavyweight Al Rajhi Bank gained 1.3 percent, Riyad Bank climbed 2.8 percent and Samba Financial Group rose 1.6 percent.

“There is improved sentiment from local investors, there’s fresh money coming from the sidelines and people are moving money out of real estate into the equity market,” said Farouk Miah, acting head of research at NCB Capital.

Investors are bullish on the banking sector as fundamentals are expected to improve.

“Banks have been underperforming for a few years but in 2012 their core operating profit should improve,” Miah added.

Bellwether Saudi Basic Industries Corp (SABIC) was the biggest support, rising 1.3 percent to a six-month high.

In the UAE, small-caps lifted Dubai’s benchmark 0.8 percent to a nine-month closing high.

“Optimism is returning now, the clearest signs of which are the recent price rallies,” said Sleiman Aboulhosn, assistant fund manager at Al Masah Capital.

“Dubai’s index is up about 23 percent from the latest trough and despite that, valuations are still very cheap.”

National District cooling (Tabreed) jumped 14.9 percent to a six-month high.

Gulf Navigation surged 13.8 percent, Deyaar Development climbed 7 percent and Union Properties was up 6.6 percent.

Mortgage lender Tamweel and Shuaa Capital rose 5.6 and 7.4 percent respectively.

“The market is overbought in Dubai but the price trend is looking good,” said Bruce Powers, head of research at Trust Securities. “The next thing to watch out for is the degree and speed of a pullback and subsequent strength, if it comes.”

In Egypt, the main index slipped 0.3 percent, trimming 2012 gains to 38.5 percent.

“The market is not in a bad shape but people are still hesitant to step in at current levels,” said Chamel Fahmy of Pharos Securities. “The strong selling pressure was yesterday.”

Telecom shares declined after mobile operator Mobinil posted a fourth quarter net loss a day earlier. It fell 0.9 percent.

Orascom Telecom shed 2.2 percent.

Commercial International Bank was among the top gainers, climbing 1.9 percent on investor optimism before its fourth-quarter financial results.

In Abu Dhabi, the index advanced 0.3 percent to its highest close since October.

In Qatar, the benchmark edged up 0.1 percent.

In Kuwait, the index eased 0.2 percent, down for a second day since Monday’s seven-month closing high.