The FTSE 100 index was up 132.07 points, or 2.4 per cent, at 5,767.66 by the close.
Leading US lawmakers expressed confidence on Sunday that a deal would be reached to avert the $600bn “fiscal cliff” of tax rises and spending cuts which could tip the world’s biggest economy into recession.
This followed a late rally on Wall Street on Friday after leaders of the US Senate and House said they would find common ground over their policy differences.
“There was obviously a great deal of worry over what was perceived to be a prolonged debate (over the fiscal cliff), but the statements from [US President] Obama and [Treasury Secretary] Geithner on Friday helped the markets out,” said Zeg Choudhry, head of quities trading at Northland Capital Partners.
“We definitely got oversold. It remains to be seen as to whether or not we will hold a rally. It’s a very good rally, two per cent, and we should get another push again tomorrow, as long as Wall Street holds up.”
Yesterday’s rise came after after a 1.3 per cent drop on Friday took last week’s falls to 2.8 per cent in total.
The rebound was broad-based, with every sector contributing to the index’s rise, although the most economically sensitive stocks such as commodities and banks , led gains. Financials, which include banks, insurers and brokerages, added nearly 40 points to the index.