The FTSE got a boost from strong corporate results, higher oil prices and improved risk appetite on Tuesday, enabling it to post its best performance in three months in January.
After a gloomy 2011 -- when the FTSE-100 <.FTSE> lost 5.6 percent -- the new year has heralded a cautious return to risk, with British fund managers raising equity allocations to 49.9 percent and cutting cash, according to a Reuters poll.
London's benchmark index closed up 10.52 points, or 0.2 percent, at 5,681.61 on Tuesday. That takes its gains for January to 2 percent -- its best showing since a strong rally in October and offering investors the chance to earn as much in one month as they would in a whole year of holding gilts.
The FTSE volatility index -- a gauge of investor risk aversion -- eased nearly 3 percent from Monday's two-week highs <.VFTSE> after Greece reported significant progress in its debt restructuring talks. Investors have been worried about the possibility of a messy default in Greece, which would strike a heavy blow to the euro zone, Britain's biggest trading partner.
Overnight, the European Union also agreed to a German-inspired pact for stricter budget discipline, which it hopes will tackle the underlying causes of the region's debt crisis.
It's a response to what happened overnight, and hoping that we will have some sort of conclusion with regards to Greek debt, Dwight Burden, who works in equity sales at Merchant Securities, said of Tuesday's stock market gains.
Strong corporate earnings also boosted the FTSE.
Given Apple's blowout numbers last week it would have been surprising if they hadn't done well, Michael Hewson, market analyst at CMC Markets, said.
Solid results also helped boost pay-TV group BSkyB
Energy companies <.FTNMX0530> led the advance among the sectors. North Sea Brent crude jumped as much as $3 per barrel at one point, pushing shares in FTSE heavyweight oil major BP
Lacklustre U.S. consumer confidence data took some gains out of the market towards the end of the session, casting doubts over the spending power of the world's biggest economy.
(Editing by Hans-Juergen Peters)