The FTSE 100 rose in early trading on hopes Greece was nearing a debt swap deal required to salvage the nation's finances while European leaders agreed on stricter budget discipline measures to help prevent further debt disasters in the region.
Greek Prime Minister Lucas Papademos said negotiators had made "significant progress" in talks to strike a restructuring deal for Greek government debt, with the aim of having a definitive agreement by the end of this week.
And every EU member country except the UK and the Czech Republic vowed to cut budget deficits and submit themselves to greater scrutiny from the European Commission.
However there were still factors holding back a strong rally including Portugal's borrowing costs soaring in the face of record low business and consumer confidence.
Meanwhile ratings agency Standard & Poor's warned it may downgrade "a number of highly rated" group of 20 countries from 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to ageing populations
In London iPhone chip maker Arm Holdings was the most significant climber on the blue chip index, up more than six per cent after it reported pre-tax profits which beat market forecasts.
BSkyB was up by 3.7 per cent after announcing that it is to launch an online TV service in a bid to capture more customers.
Meanwhile BP was up 2.7 per cent and National Grid two per cent as the resources sector performed strongly.
Insurer Admiral, up two per cent, was another main gainer.
On the down side heavyweight UK banks were the poorest performers on the index as the nagging doubts over Greece and unease over what the new European pact will mean for them having an impact.
Oil services group BG edged down by 0.8 per cent and Cairn Energy 0.4 per cent.
Meanwhile FTSE-250 listed Ocado was up 4.7 per cent after reporting that sales growth was picking up. On the negative side electrical retailer Dixons was off by 3.7 per cent after it announced that chief executive John Browett, who is in the middle of a turnaround plan for the company, is joining Apple.
Another high street name, Carpetright, dived by six per cent after a disappointing trading update.
In Asia the Nikkei closed up 0.1 per cent and the Hang Seng 1.1 per cent.
Underlining the fragile state of the UK's recovery Bank of England figures showed that consumer credit fell by £0.4bn in December, Bank of England data showed, confounding forecasts for a £0.4bn rise.
Across the Atlantic later US consumer confidence data is due for release.