Fears that London shares, undermined last week by the surprise increase in British interest rates, would fall further ahead of tomorrow's crucial meeting to determine US interest rate policy, proved groundless yesterday.
Some soothing words from Dr Hans Tietmeyer, the Bundesbank president, a relatively stable performance by most far eastern markets and Wall Street's initial rally yesterday, all helped to bolster London's sagging confidence.
There was also a sudden burst of takeover stories, both rumoured and actual, which injected much-needed interest into a market which has suffered badly recently from the lack of positive news.
And the domestic economic news on producer prices was viewed as market-friendly, keeping gilts on a steady route.
Sentiment in British equities was given a further boost by the latest Merrill Lynch survey of fund managers which revealed that UK fund managers have become increasingly optimistic about UK stocks after the recent falls and see the market as cheap.
By the close, the FTSE 100 index had recouped more than a third of Friday's near 100-point slide, closing 42.5 up at 4,806.8.
Most of the big gains were confined to the leaders, however, with the second-liners and smaller capitalised issues only able to post marginal improvements. The FTSE 250 settled 2.3 firmer at 4,640.8, while the FTSE SmallCap edged ahead 2.7 to 2,310.6.
The market had a much more confident feel to it at the outset thanks to the performance of the Dow Jones Industrial Average on Friday, when it saw a fall of almost 200 points halved by the close. There was also a relatively insignificant 1 per cent fall on the Hong Kong market yesterday.
That news, coupled with the benign producer prices data, which showed input prices down 0.2 per cent against a consensus forecast of a 0.3 per cent rise and output prices up 0.1 per cent against expectations of 0.2 per cent, was well received by the stock market.
Footsie was quick to respond, hitting a session-high of 4,828.3, up 64.0 over the lunchtime period. Wall Street came in on a firm note, but began to drift off, taking London with it, before a late spurt saw Footsie surge ahead again.
The biggest takeover story concerned the battle for MCI, the US telecoms group, where BT has a 20 per cent stake. The British group signalled its intention to accept the increased offer from WorldCom, which will see BT emerge with a massive profit on its original investment and a deal with the merged World Com/MCI.
Other takeover stories included reports of a Barclays Bank bid approach to Legal & General, one of the market's long-time targets, talk of bids in the offing for Vosper and Hambros and news that Intrum Justitia, the credit information group, is in talks with a potential bidder.
The only real disappointment was the continuing low level of turnover. Turnover in equities at 6 p.m. was just 610 million shares.
