The UK market shook off its summer lethargy to mount a strong rally yesterday, helped by better-than-expected inflation news, monetary easing in Japan and hopes for interest rate cuts in Europe.

The underlying rate of inflation fell more sharply than expected in July - 0.6 per cent on the month with the annual rate dropping to 2.2 per cent - while the headline rate declined to 1.6 per cent.

The decline was sparked by lower food prices and motoring costs, the two factors which had pushed up inflation in previous months.

The figures were seen as opening the way for the Bank of England's monetary policy committee to cut interest rates again. Meanwhile, the Japanese stock market staged a rally after the Bank of Japan agreed to pump more liquidity into the economy in a bid to head off recession.

And lower-than-expected inflation figures in France and Spain encouraged hopes that the European Central Bank will cut interest rates at the end of the month.

With the US Federal Reserve set to cut rates next week, it looks as if central banks in the UK, US, Europe and Japan will all ease monetary policy in August.

The FTSE 100 index was strong at the opening, even before the inflation news, after Nasdaq had staged a late rally in New York on Monday.

When better-than-expected US retail sales were released, easing fears of a recession, Footsie reached its best level of the day of 5,525.6, up 94.5.

In the event, Wall Street did not open as strongly as traders hoped and the Dow Jones Industrial Average and Nasdaq Composite were roughly flat as London closed.

The FTSE 100 drifted down to finish 76.7 ahead at 5,507.8.

On the corporate front, speculation continued to surround Marconi.

There were rumours of a profit warning, fears that the company could drop out of the FTSE 100 at the next reshuffle and Goldman Sachs downgraded its recommendation on the stock.

The shares fell 12 per cent, the worst performance among the blue-chips.