The rise, which later fell away in a volatile day's trading, saw Britain's biggest companies valued for the first time at more than pounds 1 trillion.
FTSE International, the company which publishes the index of leading shares, was forced to suspend the FTSE 100 for five minutes after rogue trades went through at as little as one-third of the market price.
Institutions privately said wild fluctuations, which saw the index swing by 230 points, had discredited the entire system. One large fund manager, which handles billions of pounds of index-tracking funds, said it would protest to the Stock Exchange.
In just 15 seconds, between 10.15 and 15 seconds and 10.15 and 30 seconds, the index plunged by 160 points, only to soar by 140 points before the minute was up.
Traders were unable to see the fluctuation as FTSE International had suspended the index between 10.15 and 10.20. The index was then recalculated without including two rogue trades in British Gas shares.
It is understood that in one bogus trade, 50,000 BG shares were traded at 108p, just over a third of the more normal BG price of 302p. In the same minute between 10.15 and 10.16, a further 150,000 BG shares were sold at 200p.
Stephen Vale, spokesman for FTSE International, said the trades were "out of line with previous trades in the stock and broke the automatic parameters". It is believed to be the first time the FTSE 100 has been suspended since the Stock Exchange introduced its order-driven trading system last October.
A spokeswoman for one well-known fund manager, which handles billions of pounds in funds designed to track the index, said: "It is a bit of a funny system that can actually allow something like that to happen. The fact that you can have prices moving around like that - and you can't trade effectively - doesn't do the system any credit."
The wild fluctuations happened in the 20 minutes between 10.10am and 10.30am, the official period when futures contracts on the FTSE - financial instruments used to bet on market movements - were due to expire. Trading was at four times its normal volume on expiry dates.
Trading screens turned from a block of blue into a sea of red at the blink of an eye, rising at one point to achieve a 107 point gain before plunging to register a 117 point deficit.
The basket trades came in so quickly that stock exchange information systems simply failed to keep up. At one point, Reuters and Bloomberg screens differed by 150 points in the level they gave for the FTSE 100.
Simon Fine, UK equity strategist at Kleinwort Benson, said: "Both the futures and the options were expiring on a lot of volatility. Obviously someone had a quite large exposure which has caused the volatility."
Market sources said the volatility was caused by a pitched-battle between investment banks as the futures contracts expired. Wave after wave of "basket trades" - simultaneous trades in every company in the FTSE 100 - sent the index soaring and plummeting.
Goldman Sachs, the giant American investment bank, was seen as a big seller of stocks, while other investment banks were net buyers.
Traders said Goldman Sachs was believed to have had a giant short position on FTSE futures, effectively betting that the index would be lower than others thought. It was selling shares which it had bought to hedge this position. The volume of sales put downward pressure on the FTSE.
The Stock Exchange's order-driven trading system normally suspends trades which are more than 20 per cent above or below the opening price - or the last order book trade. But this rule is lifted during the expiry period for FTSE futures.
In December last year, the Stock Exchange slapped a record fine of pounds 350,000 on JP Morgan Securities for stock manipulation. The fine followed an investigation into suspicious trading on 28 November, which found the firm had violated rules which outlawed attempts to manipulate the index.
Market sources believe the rogue trades yesterday could have been caused by a mistake, rather than deliberate manipulation.
The surge in the FTSE was fuelled by a widespread belief that investors would invest heavily in Personal Equity Plans (PEPs) following the Budget. On Tuesday, Gordon Brown, the Chancellor of the Exchequer, ended fears that Pep savings made before April next year would be limited to a total of pounds 50,000.
The FTSE momentarily hit 6,105 - a record level which values the top 100 companies at over pounds 1,000 billion - before slumping to 5880 and settling at 6042.
After Wall Street opened, shares came off sharply and closed at 5956.3, down 41.6 on the day.Reuse content