The FTSE 100 index put on 38.5 points to close at 3,992.2, and analysts predicted it could soon push through the 4,000 level if optimism about the economy continued to dominate investors' moods.
Cash-rich institutions appear to be ignoring predictions from PDFM, the fund managers, of a looming stock market crash comparable with or worse than 1987, and instead are stepping up their share purchases.
The close was only 1.9 points below the best ever intra-day level, reached on 20 September.
The buoyancy yesterday was helped by takeover speculation and a firm gilts market, and it came despite suggestions in the City that the latest purchasing managers' survey was enough to rule out any lingering hope of a further cut in interest rates.
Some economists believe this new evidence could tip the balance towards a rise in interest rates over the next few months.
The Chartered Institute of Purchasing and Supply said the Purchasing Managers' Index of manufacturing activity rose for the fourth successive month in September to 53.4 per cent, its highest level for 17 months, from 52 per cent in August.
Output and new orders showed the largest monthly increase for two years, fuelled by consumer demand which has expanded order books of consumer goods manufacturers.
Angela Knight, treasury economic secretary, said: "The survey is further evidence that the recovery in manufacturing is strengthening."
Coming a day after strong house price figures from the Nationwide building society, some economists think the economy could soon be firing on all cylinders now that manufacturing is catching up with other activities.
"The survey shows the manufacturing sector on the brink of a fully-fledged recovery," said Alex Garrard, UK economist at UBS. Even the investment goods sector, which has been particularly slow to recover, is showing the first signs of revival. The survey said: "In September, growth appears to have filtered down a further level, to producers of investment goods such as plant and machinery."
The survey found commodity prices fell, although the number of companies reporting a fall in prices dropped to its lowest since January. The prices index rose to 44 per cent from a revised 41.7 in August, the second consecutive monthly rise.
In contrast to the UK, evidence from a purchasing manufacturers' survey in the US showed that manufacturing growth slowed in September, pointing to slower economic growth ahead. The index was weaker than expected and boosted US markets by calming fears of inflation.
The US index fell to 51.7 last month from 52.6 in August. A reading above 50 indicates growth in manufacturing while one below that level shows contraction is likely.
In a separate US report, the Conference Board index of leading indicators, a key economic forecasting gauge, rose 0.2 per cent in August, the same as in July. This was seen as a sign of slower but steadier growth in the third quarter and beyond.