The London market pushed ahead as City experts said there was now a high chance of an interest rate cut next month after the UK economy slumped at its fastest rate since the financial crisis.
The FTSE 100 Index stepped up 30.6 points to 6730.5 as investors expect the Bank of England to administer a fresh dose of monetary stimulus in August after a closely-watched report showed UK economic growth had suffered a "dramatic deterioration" following the Brexit vote.
The Markit Flash UK Composite Output Index plummeted to its lowest level since April 2009, falling to 47.7 in July, compared to 52.4 in June. A reading above 50 indicates growth.
The PMI data, collected between July 12 and 21, provided a stark picture of the state of the UK economy following the referendum result, with City experts now warning that Britain could be heading for a recession.
Neil Wilson, markets analyst at ETX Capital, said "The readings suggest we are heading for a recession again and it is almost certain the Bank of England will pull the trigger on aggressive stimulus to boost aggregate demand."
The report caused sterling to sink 1% against the dollar at 1.308 US dollars, while the pound fell 0.5% against the euro at 1.192 euro.
Howard Archer, chief UK and European economist at IHS Global Insights, said: "A truly horrible survey - pointing to the Brexit vote immediately giving the economy a good kicking as uncertainties and concerns set in.
"The weakness is spread across manufacturing and services with output, orders, employment and sentiment all suffering major downturns."
He added: "Whether it starts in the third or fourth quarter, we suspect that the UK is headed for mild recession, although we expect it to be brief.
"We currently forecast UK gross domestic product to grow by 1.6% in 2016 (largely due to the first half expansion) and 0.2% in 2017."
Across Europe, Germany's Dax was marginally down, while the Cac 40 in France rose slightly.
In stocks, Vodafone was the biggest riser after notching up its eighth consecutive quarter of rising sales by hitting a better-than-expected 2.2% lift in revenues.
The company said its preferred measure of performance, group organic service revenue, edged up 2.2% to 12.3 billion euro (£10.3 billion) in the first quarter to June 30.
However, organic service revenue for the UK was down 3.2% over the period to 1.8 billion euro (£1.5 billion) after problems with a new billing system sparked a wave of customer complaints.
Shares were up more than 4% or 10.5p to 235.6p.
Housebuilders were suffering once again on the top-flight as the threat of possible UK recession posed by the PMI update caused investors to flee from property stocks.
Berkeley Group was down 3% or 92p to 2605p, while Charles Church builder Persimmon slipped 35p to 1596p and Barratt Developments dropped 10.5p to 411p.
Budget airline easyJet was the biggest faller on the market as it continued its slump from the previous session when it admitted to facing the most difficult summer holiday season for years.
The low-cost carrier said it has been forced to slash fares, which are down by more than 5% year on year, to boost demand, while costs have surged after the pound fell around 10% since the UK's decision to leave the EU.
Shares were off more than 3% or 40p to 1027p.
The biggest risers on the FTSE 100 Index were Vodafone Group up 10.5p to 235.6p, HIKMA Pharmaceuticals up 68p to 2590p, CRH up 57p to 2252p, and AstraZeneca up 89p to 4612.5p.
The biggest fallers were easyJet down 40p to 1027p, Marks & Spencer down 11.7p to 316.8p, Berkeley Group down 92p to 2605p, and Rolls-Royce down 23.5p to 720.5p.
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