At the close, the FTSE 100 was up 31.69 points, or 0.5 per cent, at 5,983.49, edging ever closer towards the 6,000 level last seen in June 2008.
The blue chip index has gained 8.2 per cent in December, on track for its biggest monthly percentage gain since July 2009.
“It’s just a pretty broad-based market rally as Christmas approaches. Of course, volumes are very low and it’s really just tidying up at the year-end,” said David Morrison, market strategist at GFT Global.
Trading volumes were 62 per cent of the 90-day average.
Banks were the best performing blue chips as a sector, rallying as worries about exposure to European debt eased after the Jornal de Negocios daily reported that China is ready to buy €4 to 5bn of Portuguese sovereign debt to help it ward off pressure in debt markets. Royal Bank of Scotland was the strongest lender, up 1.3 per cent, while Lloyds Banking Group gained 0.7 per cent.
Strength in heavyweight miners and oils also provided a prop for blue chips as commodity prices firmed, with Eurasian Natural Resources 2 per cent higher.
ARM Holdings was the top blue chip riser, up 9.1 percent on reports Microsoft is working on a new version of its core Windows operating system for devices such as tablets, marking the first time that the software would run on processors designed by the British firm.
Both Microsoft and ARM declined to comment.
\BSkyB took on two per cent, having earlier touched its highest since March 2004, as prospects improved of regulatory approval for News International’s bid to buy the pay-TV operator.
Carnival rose 5.3 per cent as brokers raised target prices and estimates for the world’s largest cruise operator following its fourth-quarter results on Tuesday.
And British Airways rebounded 1.9 per cent as travel services limped back towards normal in parts of Europe after ice and snow caused widespread chaos.
Oil prices also pushed higher – above $90 a barrel again, hitting two year highs as crude inventories declined by more than expected by 5.3m barrels as a result of the cold weather, while gold prices continued to push marginally higher around the $1,369 level after the IMF completed its recent gold sales.
Investors are entering 2011 in a relatively bullish mood, raising equity holdings to a 10-month high, increasing exposure to high-yield credit and cutting back on government debt, a Reuters polls showed yesterday.
US blue chips were 0.1 per cent higher by London’s close as above-forecast US existing home sales data countered a below-estimate final reading for third-quarter US GDP.
British GDP data was also a depressant, with the economy growing by less than expected in the third quarter, while the second quarter reading was lower than first reported.
And the Bank of England’s Monetary Policy Committee retained its three-way split at December's meeting, with growing worries about rising medium-term inflation risks.
“The Santa Rally continues. Despite the thin volumes currently out there, London’s leading index is still making gains in the run up to the holidays,”?said Ben Critchley, sales trader at IG Index.