A resurgence of confidence that British interest rates are firmly on the downward path, a burst of take-over activity in the US and hopes that the worst of the recent turbulence in global markets may be over, gave a big boost to London's equity market.
Dealers were caught out once again by the power and speed behind the latest burst of strength in British equities, which drove the FTSE 100 index up 174.4 or 3.4 per cent, the fifth biggest single day's points rise in the index.
Market-makers, taken aback by the market's latest rally, said the exceptional gains in share prices were the result of a "classic and painful bear squeeze".
They said London was caught on the wrong foot by the sudden burst of take-overs and mergers on Wall Street on Monday night, which helped the Dow Jones Industrial Average advance a short 50 points by the close.
The strength pulsing through the leading stocks did not follow through entirely into the second-liners and small caps but both of those sectors managed to record good gains.
The FTSE 250, which has outperformed the front-line benchmark over the past couple of sessions, settled 57.0 higher at the day's best level of 4,630.8, while the FTSE SmallCap also finished at a session high, ending the day 14.4 ahead at 1,935.7.
The overnight bid/merger mania on Wall Street was partly responsible for the return of confidence in the British market, as was a report that Deutsche Bank had held preliminary take-over talks with Bankers Trust of the US.
Turnover in equities reached 1.22bn shares, the highest daily total for some months and was boosted by the big bought deal in Signet, carried out by Deutsche Morgan Grenfell, which accounted for 111 million shares.
