Britain's top share index rebounded 2.9 percent after a hefty rate cut by the U.S. Federal Reserve propelled heavyweight financial stocks higher.
The FTSE 100 closed up 161.9 points at 5,740.1 in a volatile session, having fallen as much as 4.3 percent earlier in the day. Volumes were at their highest level since October 2007.
The UK's blue chip index tumbled 5.5 percent yesterday, its largest daily loss since Sept. 11, 2001, wiping nearly 77 billion pounds off the value of the index's constituent stocks. The FTSE 100 has lost 11 percent so far this year on concerns over the health of the U.S. economy.
The FTSEurofirst 300 index of top European companies also finished the day higher.
"At a time when asset prices are declining, a big cut in interest rates may not save the day. I honestly couldn't tell you at this point in time whether a recession would be avoided or not," said Edward Menashy, an economist at Charles Stanley.
"My suspicion has been that the economy was actually stronger than what most people had been predicting. We were on track to avoid a recession anyway."
Rate-sensitive banks, which have been hammered by global credit market turmoil in recent months, were the biggest winning sectors on the FTSE 100, contributing 57 points to the index.
Barclays, Royal Bank of Scotland, HSBC, HBOS and Lloyds TSB advanced between 3.9 and 9.2 percent.
Property stocks and housebuilders were also given a lift by the rate cut, with Hammerson up 6.3 percent, Land Securities gaining 7.9 percent and Persimmonclimbing 7.8 percent.
The Fed slashed interest rates by three-quarters of a percentage point, the biggest cut in more than 23 years, in an emergency bid to lend support to the U.S. economy.
The Bank of England, however, said it has no plans to bring its Feb. 6-7 Monetary Policy Committee meeting forward after the U.S. move.
Commodity shares were also in demand. In the mining sector, Anglo American, BHP Billiton, Kazakhmys, Antofagasta, Rio Tinto, Vedanta Resources and Lonmin all rose.
Oil major BP advanced 1.5 percent and Royal Dutch Shell put on 0.9 percent.
Defensive sectors, like telecoms, utilities and tobacco stocks, were out of favour with investors on a day when the market was buoyed by the U.S. rate cut.
Imperial Tobacco fell 4.1 percent, BT Group dropped 1.9 percent, National Grid slipped 1.6 percent and United Utilities dipped 1.4 percent.
"Rather than instilling confidence into the markets I think it will just throw in more panic, so we'll get a short-term rally, followed by (which) most of the equity markets are going to get an absolute hosing again," said Neil Parker, market strategist at Royal Bank of Scotland.