The upbeat news from Europe boosted appetite for riskier assets such as banking and commodity stocks, which helped the UK’s benchmark index surge 160.58 points or 2.9 per cent to 5,713.82, its highest close since early August.
London’s blue chips have gained more than 19 per cent since plunging to a year's low on 9 August, when concerns peaked over Europe’s debt crisis and the threat of a global slowdown.
Financials rallied as the deal boosted confidence that politicians were keen to do what it takes to prevent the collapse of the banking system.
Barclays leapt 17.6 per cent, leading the bank sector higher, while Aviva, up 8.8 per cent, headed a strong performance by insurers.
The FTSE is now just 2.9 per cent off breaking even for the year, while the FTSE Volatility index hit a three-month low, a sign that investors’ nerves had calmed.
Earlier the index broke through the 61.8 per cent Fibonacci retracement level of around 5,590 from the August low and just failed to hold above the 200-day moving average around 5,720.
After marathon talks in Brussels European leaders agreed banks holding Greek debt should accept a 50 per cent “haircut”. A mechanism to boost the Eurozone’s main bailout fund would be extended to about €1 trillion and banks must also raise more capital to protect them against losses resulting from any future government defaults.
Adding to the upbeat mood, US data showed the economy grew at its fastest pace in a year in the third quarter, calming fears the world’s biggest economy was heading back into recession.
“The train is back on the tracks, but don't expect a smooth ride just yet,” said David Miller, partner at Cheviot Asset Management.
“It is good to see progress [in Europe], but we are still a fair way off a sound resolution ... Real money will be needed to resolve the debt problem; the question now is where this is going to come from. Until then, sentiment will remain fragile.”
For now, commodity issues saw strong demand as investors moved back into riskier assets, with crude oil, copper and gold all gaining.
Royal Dutch Shell was a top energy gainer, up 1.2 per cent, after reporting a doubling in third-quarter net profit, thanks to higher oil prices.
Miners were the second top performing sector on hopes the deal in Europe would spur growth in the region, which had all but stagnated, and improve the outlook for demand.
Kazakhmys rose 9.4 per cent after saying it was on track to meet its full-year target.
Defensive stocks, which had led the index higher on Wednesday as nervous investors turned to stocks seen as a shelter for their investments in case a deal could not be reached in Europe, inevitably fell back.
Drugmaker AstraZeneca underperformed the FTSE after its third-quarter results failed to excite and analysts said the market had been anticipating higher earnings due to foreign exchange effects.
Peers GlaxoSmithKline and Shire, which are due to report today, fell as much as 1.6 per cent, while other defensives including National Grid and British American Tobacco fell.