The company's brokers, Cazenove, have repurchased just under 100 million shares - about 5 per cent of British Steel's equity - at a maximum of 155p each.
The market reacted favourably to the buy-back, marking British Steel shares up by 10p to 159.5p.
British Steel gained shareholder approval to buy back up to 10 per cent of its share capital at last year's annual meeting, and it hinted that a repurchase might be on the cards alongside its preliminary results last month.
These showed that profits collapsed by 60 per cent to pounds 451m last year because of the pound's strength against the German mark - the currency in which steel is traded in Europe - and price weakness.
At the time analysts were pencilling in a further drop in profits this year to between pounds 150m and pounds 200m.
Since then sterling has strengthened still further, breaching the DM3 mark, while the Budget inflicted more pain with the abolition of dividend tax credits. There has also been another rise in interest rates, boosting the pound further.
Although steel prices have begun to harden and British Steel is accelerating its programme of job cuts, John Bowden, director of investor relations, said it would only partially offset the strength of sterling.
The company is assuming an average exchange rate this year of DM2.75 to the pound against DM1.46 last year.
"Essentially our balance sheet was healthy but our shares were very depressed and we thought they were also undervalued," Mr Bowden said.
British Steel had net cash of pounds 785m at the end of last year and paid a dividend of 10p.
Even with the share buy-back, the dividend may not be covered by earnings this year if British Steel holds the payout and profits fall as sharply as analysts forecast.
One broker believes British Steel will actually make a loss this year.
The shares had been propped up by heavy US buying, with investors in New York treating British Steel as a highly-geared play on currency movements. and prices. A 2 per cent movement in prices this year will be enough to raise or lower profits by pounds 150m.