The FTSE index rose on Friday as investors took the positives out of agreements at the European summit.
Talk of potential Chinese investment in Europe and improving economic data in the U.S. also lifted sentiment.
While not the emphatic solution to the euro zone's two-year old debt crisis some had hoped for, EU countries came to a deal on budget rules and other measures to help to restore confidence and move toward resolving the debt crisis.
Some of the political risk may start to ease a bit and markets may start to focus more on the global economy and what central banks are planning to do to stimulate economies, Colin Cieszynski, a market analyst at CMC Markets, said.
We have seen some profit-taking against the EU news today offset by some bargain-hunting as the risk of worst case scenarios occurring fade, which could create some opportunities for trading.
Beaten down banks and miners -- sectors which have lost around a quarter of their value in 2011 -- climbed higher as London's blue chip index <.FTSE> added 45.44 points, or 0.8 percent at 5,529.21.
Part state-owned Lloyds Banking Group
Markets appear attractive from a valuation standpoint, said Gerard Lane, equity strategist at Shore Capital.
The FTSE 100 currently trades on a price to earnings ratio of 9.9 times, compared with a historical average of around 14 times, and a price to book ratio of just 1.57, according to Thomson Reuters data.
Its dividend yield of 4.15 compares favourably to those offered on safer euro zone and U.S. bonds.
There are fundamental reasons (behind the valuation argument) based on better than expected U.S. economic data (and) that the easing in the earnings downgrade cycle may continue, thus alleviating the risk of a continued sell-off, Lane said.
According to Thomson Reuters data, earnings momentum -- analysts' upgrades minus downgrades as a percentage of total estimates -- for FTSE 100 companies is -8.3 percent, versus -10.8 percent a month ago.
The U.S. economy continues to outperform expectations offering a ray of light in an otherwise gloomy outlook, despite its own debt problems and the threat posed by Europe's downturn.
Wall Street was sharply higher as the UK market closed after U.S. consumer sentiment rose more than expected to its highest level in six months in early December.
Talk of Chinese central bank plans to create a new vehicle to manage two investment funds worth a total of $300 billion (191.85 billion pounds), one targeting investments in the United States and the other focused on Europe, also boosted appetite for riskier assets.
With the risk trade back on for the time being, defensive stocks littered the fallers list, with National Grid
UBS strategists said the recent market moves probably reflected some pricing out of extreme negative scenarios, but risks remain.
We believe the market is priced for a small decline in earnings next year, UBS said.
While we see upside to end-2012 (target 6,100 for FTSE 100), we believe that we would need to see a big positive surprise from EU politicians to push convincingly through this range-bound market in the near term.