A jump in German and eurozone economic sentiment figures for a second consecutive month fuelled hopes that the region had turned the corner and sent stock markets leaping higher.
The FTSE 100 closed 1% or 60.9 points ahead at 6379.1 – its highest level since January 2008 – while the Cac 40 in France and Germany's Dax rallied 1.9% and 1.6% respectively.
On Wall Street, the Dow Jones Industrial Average on Wall Street was also higher in early trading.
Craig Erlam, market analyst at Alpari, said the eurozone data suggested "we may finally be seeing some light at the end of the tunnel".
But it was another tough day for the pound amid rumours that ratings agency Standard & Poor's will be the first to strip the UK of its coveted triple A rating. Sterling plunged to a seven-month low against the dollar, at $1.54, and to €1.15.
Among stocks, Vodafone shares were 2% lower as concerns resurfaced over the mobile phone giant's prospects in battered European markets.
With broker Bernstein cutting its price target to 135p from 170p in the wake of the company's recent trading update, Vodafone shares slipped 3.3p to 163.5p.
Vodafone was also linked with a possible bid for German firm Kabel Deutschland.
Banking group Standard Chartered, which is focused on Asian and emerging markets, was among the biggest risers, up 41.5p to 1771p after Morgan Stanley upgraded its rating.
Broadcaster ITV followed up yesterday's 3% rise with an improvement of 2.7p to 123p as takeover speculation continued to swirl over the group.
Lloyds Banking Group rose 0.6p to 55.3p, despite a fine of £4.3 million from the Financial Services Authority for failings that resulted in up to 140,000 customers receiving delayed payment protection insurance redress.
As well as Vodafone, Holiday Inn parent InterContinental Hotels was 36p lower at 1953p after results showing a 10% rise in full-year profits to $614 million (£396.2m) prompted investors to take profits following a recent strong run for the shares.
The biggest FTSE 100 risers were TUI Travel up 13.1p to 329.7p, Rolls-Royce ahead 39p to 1043p, Aberdeen Asset Management 12.7p higher at 437p and RSA Insurance up 3.9p to 136.3p.
The biggest fallers included Morrisons, 3.1p lower at 260.8p.
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