The FTSE 100 index ended up 48.24 points, or 0.7 per cent, at 6,803.87, its highest finish since its record close of 6,950.60 in late 1999.
“There is nothing to suggest that we can’t keep going higher. We have broken through previous highs and it can be sustained if we see economic recovery and earnings upgrades come through,” Neil Shah, director at Edison Investment, said.
Recent UK data has suggested the economy may be picking up and further upbeat data from Britain and other major economies would help support equity valuations, which have re-rated to post-credit crisis highs of around 12.8 times 12-month forward price-to-earnings.
Shah said stocks becoming too expensive or central banks reversing stimulus policies on concerns over asset bubbles were the only potential stumbling blocks in the way of the current rally.
Corporate updates fuelled further optimism in the market. Outsourcing company Capita climbed 5.9 per cent after winning a £1.2bn contract with Telefonica's UK O2 business.
British luxury group Burberry rose 5.3 per cent after announcing a better-than-expected 14 per cent rise in profit.
British retailer Marks & Spencer also jumped, by 6.2 per cent, as investors put their faith in a turnaround after the firm posted a profit that was its lowest since 2009 but just above consensus forecasts.
It was not all rosy. Cruise operator Carnival fell 5.5 per cent after slashing its full-year earnings outlook for the second time in less than three months.
Miners, down 12.4 per cent in 2013 before yesterday on earnings and pricing concerns, were the top performing sector as Societe Generale’s commodities team said the sell-off in base metals prices had been overdone and Chinese restocking would feed a rally.
Technical analysts said the recent bounce on the FTSE 100 from the 6,710 zone suggests the rally still has legs and with the highs of 2007 now tested and exceeded, there is little major resistance until the all-time high.
Still, recent gains have forced many investors betting on a retreat in the market to close out positions and David Lewis, head of EMEA stock lending at Sungard’s Astec Analytics, said the market remained cautious.
“The value of stock on loan has fallen by a fifth in the last month,” he said. “However, short interest remains 40 per cent higher than the average of the last 12 months, suggesting that a lot of people are betting on a correction.”