The London stock market continued its rally yesterday despite a mid-afternoon hiccup in the wake of some hawkish comments from Mr Alan Greenspan, chairman of the US Federal Reserve.

Mr Greenspan said substantially higher interest rates might be needed to contain booming US demand and that economic risks were still tilted towards higher US inflation. He added that a rise in US equity prices in excess of income growth was unsustainable. The FTSE 100 index, which had been 114.8 points higher at best, slipped back to be almost level for the day. But the forward momentum proved too strong and the blue-chip benchmark finished 61.9 ahead at 6,209.3.

Earlier in the day, the main focus of market attention had been the British inflation outlook. The latest retail sales numbers, like the annual earnings figures released on Wednesday, were perceived as making further interest rate increases more likely. The month-on-month gain in January was 1.5 per cent, far higher than expected, taking the annual rise up to 6.1 per cent.

Footsie actually hit its low for the day of 6,102.9, down 44.5, just after the retail sales data were announced. But the Office for National Statistics said that high street prices were falling and the sales surge could be due to one-off factors.

Speaking later, Mr Mervyn King, the Bank of England's deputy governor, said the markets should not pay too much attention to one month's figures. And the bank's quarterly inflation report was generally perceived to be less hawkish on interest rates than had been feared. The report helped Footsie rally over lunchtime before Mr Greenspan's remarks were flashed on the wires at 3 p.m.

There were signs that investors were bargain-hunting among the old economy stocks that have been heavily sold off over the last few months. Associated British Foods, Cadbury Schweppes and Whitbread were among the strongest performers in the FTSE 100 index.

"The valuation of the equity market is increasingly skewed by the new economy," according to the UK strategy team at Credit Suisse First Boston. "The telecom, media and IT sectors now make up a third of the market in market cap terms. This compares to just over a quarter at the end of last year."

Credit Suisse asked whether the valuation gap between the old and new world companies had been pushed too far.