The FTSE 100 moved up 1.9 per cent or 113.93 points to close at 6,013.87, its highest level since June 2008, buoyed by rises on US and European exchanges on Monday when the LSE closed.
Oil giant BP was the biggest riser, up 5.9 per cent to 492.9p, alongside strong gains from British Airways (up 4.92 per cent to 285.9p), Barclays (up 4.2 per cent to 272.8p) and RBS (up 4.12 per cent to 40.7p).
“Helping the bullish side was newspaper speculation that BP had been a possible bid target in the past year for sector stable-mate Shell. Although some saw this as old news, it didn’t dampen the appetite for index heavyweight BP, pushing the share price out to seven-month highs,” said Yusuf Heusen, senior sales trader at IG Index.
RBS was boosted by Exane BNP Paribas upgrading the stock to its ‘outperform’ rating after losing five per cent of its value over the Christmas period.
Barclays and Lloyds also benefited as worries over euro zone sovereign debt faded further into the background.
And Ocado led the risers in the FTSE 250, up 10.32 per cent to 196.7p amid expectations of a strong trading update from the online grocery delivery group next week.
The main losers were stocks seen as defensive. Food producer AB Foods was down 1.4 per cent, while utility International Power slipped 1.5 per cent.
UK stocks gave up some of their gains in the final hours of trading in anticipation of another subdued set of minutes from the US Federal Reserve’s last meeting, due for publication after London closed.
In the US, the Fed remained sceptical about economic recovery and reiterated its support for further quantitative easing despite another strong set of manufacturing data.
Wall Street slid on poor results from supermarket groups. Shares of Supervalu fell nearly six per cent after Morgan Stanley told investors to cut holdings in the stock, saying rising food costs would crimp margins. Safeway and Whole Foods Market also lost ground.
Declines in oil and metals prices also dragged down US energy and materials shares.
The Nasdaq provisionally closed down 10.3 points or 0.38 per cent at 2681; the S&P 500 closed provisionally down 1.69 points or 0.13 per cent at 1270; while the Dow Jones industrial average provisionally closed marginally higher, up 20.43 points or 0.18 per cent, at 11,691.
Wednesday brings London further trading updates – and potential bad news – from retailers. “Tomorrow we can scrutinise a trading statement from Next and on Thursday from Burberry,” said David Buik, an analyst at inter-dealer brokers BGC Partners.
Heusen added: “There is still potential for shocks in the short-term when the major retailers unveil their Christmas trading numbers – but for now investors have been heartened by the strong start made to 2011.”