Traders hoping that the hours of the shortened trading session on Christmas Eve – as markets closed at 12.30pm – would include a deal between the UK and European Union were left disappointed.

The FTSE-100 started the half-day session positively, opening up 0.43 per cent, but fell back as the day progressed, ending the session up just 6.36 points, or 0.1%, at 6502.11.

But there was better news on the UK-focused FTSE Mid 250 index, which closed up 248.92 points, or 1.23%, at 20546.68.

The second-tier index has seen growth of 5.8% since hitting three-week lows on Monday.

But the standout performer has been the pound, which has enjoyed a steady rise against the dollar since Monday and looked close to hitting highs not seen since May 2018.

However, it remains far adrift of the near-$1.50 levels at which it traded on June 23, 2016, ahead of the EU referendum result.

Since lows on Monday, when the pound sank to $1.320, it advanced as far as $1.3612 during Thursday morning – a rise of 3.12%.

As markets closed on Thursday, the pound was up 0.61% on the day against the greenback, trading around $1.357. The pound was also up 0.5% against the euro at €1.113.

At the close, traders were still waiting for news on a post-Brexit trade deal.

David Madden, market analyst at CMC Markets UK, said: "The pound has seen a lot of volatility in recent weeks and months as the uncertainty of the UK's future trading relationship with the EU has impacted the currency.

"Some traders have been avoiding sterling due to the lack of clarity with respect to the EU situation.

"This morning there has been a lot of talk that a deal will be announced and that has lifted the pound. Sterling is up 0.7% versus the US dollar and at one point in the session it came within a whisker of printing a new 31-month high against the US dollar."

The French CAC-40 was flat as London closed. German markets were shut.

Optimism that a no-deal Brexit could be avoided helped banks, supermarkets and housing developers enjoy some of the biggest boosts in share prices.

Lloyds Banking Group was the biggest riser on the FTSE-100, closing up 3.99%, or 1.48p, or at 38.605p, while rival Barclays closed up 2.78p at 154.6p, and Natwest Group was up 2.05p at 168.95p.

Tesco closed up 6.7p, or 2.96%, at 232.9p, Morrisons rose 2.45p to 176.3p, and Sainsbury gained 2.7p to 226.7p.

Property companies including Barratt Developments, Berkeley Group, Persimmon and Land Securities were also all up.

Rio Tinto said overnight it has "a lot of work to do" as the Anglo-Australian miner said it had started rebuilding ties with the indigenous owners of sacred caves it destroyed in May in the Pilbara region of Western Australia.

"We know we have a lot of work to do in order to rebuild trust and confidence in our business," said acting chief executive of Rio Tinto Iron Ore, Ivan Vella.

The previous chief executive left over the scandal. Shares closed down 26p at 5,574p.

Rival Anglo-Australian miner BHP said it was close to restarting work at a Brazilian mine where an accident in 2015 killed 19 people.

It aims to produce around eight million tonnes of iron ore pellets every year from the Germano mine and its Ubu complex. Shares closed down 1.6p at 1,964.4p.

The biggest risers on the FTSE-100 were Lloyds Banking Group up 1.48p at 38.605p; Melrose up 6.05p at 178.95p; Tesco up 6.7p at 232.9p; Legal & General up 6.6p at 266.4p; and Whitbread up 76p at 3,214p.

The biggest fallers were Rightmove down 14.4p at 643p; Kingfisher down 4.6p at 265.4p; Entain down 18p at 1,145.5p; Spirax-Sarco down 175p at 11,155p; and Flutter down 205p at 15,045p.