Britain's FTSE 100 index closed strongly higher on Wednesday on expectations US interest rates will soon peak while Imperial Tobacco gained on merger speculation.
Investors took relief from minutes released late on Tuesday from the US Federal Reserve's March meeting which suggested the central bank was close to ending its monetary tightening campaign.
Building materials supplier Hanson jumped more than 4 percent, and peer Wolseley gained 3.9 percent, with dealers citing prospects of a strong US building market, given a more benign interest rate outlook in the world's biggest economy. Vague take-over talk also helped Hanson.
The FTSE ended 45.7 points, or 0.76 percent, up at 6,089.8 points, having earlier touched its highest level since February 2001 at 6,100.6. A stronger-than-expected rise in US core CPI contrasted slightly with the Fed minutes and took the sting out of the day's gains as Wall Street traded mixed.
"The picture is not altogether clear that we have definitely reached the peak in short-term US interest rates and that from here bond yields will start going down again," said Edward Menashy, economist and strategist at Charles Stanley.
The FTSE 100 index has hit five-year highs this year thanks partly to a raft of take-over stories as investors bet on which firms will become targets for companies flush with cash from continually strong earnings.
J.P. Morgan fuelled further rumours by saying a merger between Imperial and Franco-Spanish peer Altadis is more likely now than at any time in the past. It raised its share-price target on the UK firm, keeping an "overweight" rating. Imperial shares closed 4 percent up.
Insurers Friends Provident and Prudential also rose on hopes of sector consolidation.
Shares in Britain's biggest power producer British Energy added 2.3 percent after it said it had sold 65 percent of this year's projected output at prices more than a fifth higher than last year.
That news buoyed other stocks in the sector with International Power up 4.2 percent to stand out.
Oil prices raced to all-time highs above $73 a barrel on fears that Iran's escalating row with the West over its nuclear ambitions could hit supplies and after US gasoline stockpiles fell sharply.
Metals prices also traded near record peaks, boosting heavyweight oil and mining shares yet again although some investors chose to take profits in the sectors, dealers said.
"I am not altogether happy about this upward move because it is coming largely from mining companies and oil stocks. If we think about it, the oil price going higher and higher is basically an upward move in the level of tax being imposed on the consumer," Menashy added.
"We are building up a situation whereby profit margins are going to be under severe pressure as far as 2007 is concerned."
Among losers, shares in AB Foods fell 6.5 percent after a fall in first-half profits. The firm also warned of a further drop in the second half, citing tough conditions in its UK sugar business, bakery earnings and rising energy prices.
Several stocks traded without the right to the latest dividend payout including Reed Elsevier, which fell 1.4 percent.
The market was largely unmoved by news the Bank of England voted 7-1 to keep UK interest rates unchanged at 4.5 percent at its April policy meeting, with many economists forecasting steady borrowing costs for the rest of the year.
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