The FTSE 100 closed up 31.60 points, or 0.5 per cent, at 6,458.02.
The index began to rally shortly after German annual inflation eased to its lowest level in more than two years in April, boosting chances of a rate cut by the European Central Bank (ECB).
US consumer spending unexpectedly rose in March but inflation remained muted, easing concerns of an imminent end to quantitative easing in the United States.
The US Federal Reserve and European Central Bank both meet this week, and a Reuters poll of 76 economists showed 43 expect the ECB to cut rates by 25 basis points.
“A rate cut by the ECB is now priced into the markets, however, if the ECB fails to cut rates, a sharp sell-off will follow, as investors are still looking for excuses to lock in recent gains,” Mark Ward, head of execution trading, said.
Miners and oils – companies most acutely exposed to the fortunes of broader economy – rose the most.
Energy heavyweight Royal Dutch Shell gained 1 per cent, while the miners, which have underperformed the broader FTSE 100 by around 25 p
A 9 per cent rise on the FTSE 100 so far in 2013, despite anemic global growth, is giving asset managers a boost.
Aberdeen Asset Management surged 8 per cent after the fund firm reported first-half revenues leapt by 25 per cent.
That lifted sentiment among peers with Schroders up 2.2 per cent, which helped the broader financial sector, including banks, add 4.1 points to the broader FTSE 100.
Financials also received some support after Italy ended months of political deadlock by forming a government.
The deal brings an end to weeks of political uncertainty that had could have potentially further destabilised the Eurozone economy, a region to which British financial institutions have great exposure.
Meanwhile European shares rose yesterday, boosted by the formation of an Italian government after a two-month impasse and by expectations of fresh stimulus from global banks.
Italy’s FTSE MIB index was the best performer in the region, rising 2.2 per cent as new Prime Minister Enrico Letta promised to push for a change to Europe’s focus on austerity and pursue growth.
The pan-European FTSEurofirst 300 index rose 0.5 per cent to 1,202.89 points and the Eurozone Euro STOXX 50 surged ahead by 1.3 per cent to 2,717.38.