Stock markets staged a rally on reports US politicians had struck an 11th hour deal on America's looming debt deadline.

The FTSE-100 Index had earlier plunged into the red as the prospect of the world's largest economy defaulting on its debt edged nearer, but by the close of the session updates from Washington lifted it 22.5 points to 6571.6.

Germany's Dax was also up, although France's Cac 40 failed to climb out of the red by the end of the session.

On currency markets, sterling slipped against a resurgent greenback, off one cent to 1.59 US dollars, while it was flat against the single currency at 1.18 euros.

There had been a darker mood earlier in the day as markets fell amid anxiety about whether a deal could be reached, and after ratings agency Fitch warned it could strip America of its prized AAA rating.

Democrats and Republicans had been at loggerheads on Capitol Hill as today's deadline approached. Failure to reach agreement on raising the administration's £10.5 trillion debt ceiling would have risked a catastrophic US default.

But hopes were raised as senate leaders from the opposing parties agreed to a plan to avert the looming disaster - although it still had to go before the Republican-controlled House of Representatives to be passed.

Miners were among the biggest hit by the uncertainty on London's top tier. Fresnillo was down 3% during the session but pared losses as hopeful reports emerged from the US and it closed 1.6%, or 15.5p off, at 937.5p.

Meanwhile luxury goods group Burberry, which on Tuesday made the shock announcement that chief executive Angela Ahrendts was leaving for Apple, fell back earlier in the day to add to the previous session's losses, but finished flat at 1464p.

Royal Mail lost some of its post-flotation froth, down 3% or 14p to 475p, although investors are still enjoying a rise of more than 40% on the Government's price tag last week.

Some blue chips also remained under pressure after star fund manager Neil Woodford quit Invesco Perpetual.

Shares in firms in which he has built up holdings dropped after the announcement, with BAE Systems initially down again before closing up 4.1p to 443.3p on rising hope from Washington. The group has said it could be hit by the budget wrangling.

Capita, another Woodford pick, was down 7p to 963.5p.

The group will return £620m to its shareholders following the sale, which saw shares rise 29p to 1528p.

The biggest FTSE-100 risers were Hargreaves Lansdown up 50p to 1090p, IMI up 29p to 1528p, Standard Chartered up 28p to 1499.5p and Aviva up 7.2p to 435.4p.

The biggest FTSE-100 fallers were Schroders down 74p to 2568p, Fresnillo down 15.5p to 937.5p, Glencore Xstrata down 4.8p to 331.2p and SSE down 20p to 1423p.