Exuberant banks help Footsie smash last year's record; MARKET REPORT

Financials led blue chips to a record high. With the stock market growing increasingly excited by the possibility of more corporate action, as well as encouraging trading prospects, banks and the rest romped ahead, helping to lift Footsie 60.9 points to 4,168.2p.

So the old record of 4,118.5, hit at the end of the year, was conclusively smashed. Trading was often squeezy with buyers, much to the dismay of hard-pressed market makers, often prepared to chase shares.

The market was also supported by hopes that interest rates will remain unchanged in the wake of today's Ken and Eddie meeting and continued strength in New York with the Dow Jones Average testing, at least during London hours, new peaks.

There was another, rather bizarre, reason put forward for the strength of equities. The departure of high-profile fund manager Nicola Horlick from Deutsche Morgan Greenfell prompted rumours she was about to replace arch bear, Tony Dye, at the PDFM fund management giant.

The story was denied. But while it lasted it prompted speculation that Mr Dye's ultra cautious stance would be changed and PDFM, underperforming and with 15 per cent of its resources in cash, would move into the market to reduce its cash hoard.

The blue chip exuberance is seeping through to second and third liners. The supporting FTSE 250 index gained 22.3 points to 4,557.2, just 11.3 from its record reached in April last year.

Financials have been in impressive form for much of this year. Lloyds TSB led the latest charge with a 22.5p gain to 480.5p. The market is convinced the high street clearers will produce impressive figures next month and should enjoy another record year. It is prepared to ignore competition coming from a variety of directions such as building societies and superstores.

Prudential Corporation fronted the insurance pack, up 23p at 537p. A big deal is expected. The Pru could aim for another insurance group but is seen as likely to spread its wings and a merger with Abbey National, 27p higher at 800.5p, is expected in some quarters.

Commercial Union, still seen as a target for BAT Industries, rose 21p to 713.5p while BAT, said to be thinking of demerging its financial and tobacco sides, was puffed up 21p to 493.5p. Fund managers were inspired by the rush of market activity with Mercury Asset Management 36.5p in the money at 1,257.5p.

There was evidence of money moving into financials from engineering, where worries about sterling's strength are these days never far from the surface.

British Steel, meeting analysts last night, fell 5.75p to 146.75p. It is a major casualty of the pound and has been the subject of swingeing profit downgrades. The group is something of a feast or famine performer and analysts hope to learn just how difficult trading is becoming.

Rolls-Royce (with HSBC James Capel saying sell), Lucas Varity and GKN were other casualties. So were overseas earners such as Grand Metropolitan.

RMC recovered a 9p fall to close 17.5p higher at 905p after Panmure Gordon said currency concerns had been overplayed. Some oils had another smooth run. British Borneo Petroleum Syndicategained 59p to 1,085p and Premier Oil 1.5p to 41p.

Superstores were among others on song. Although many retailers failed to enjoy the predicted Christmas spectacular, food sales seem to have been ahead of expectations. There is also a feeling the sector has been overlooked; suggestions Morgan Stanley was backing food retailers helped sentiment. Somerfield rose 6.5p to 171p after NatWest Securities forecast next week's interim profit would be pounds 54.5m, putting the group on track to close the profitability gap with its competitors. Iceland, where management buy-out stories are circulating, moved ahead 1.5p to 94p.

Go-Ahead, the bus group, fell 18p to 488.5p on reports the Stock Exchange had started a probe into the recent share strength. Whitbread recovered Monday's fall on its festive trading statement, gaining 23.5p to 763.5p.

Among smaller companies XCL, the oil tiddler, gushed 5p to 20p following an encouraging report on its operations in China and United Energy responded to buying by Peel Hunt with a 1.5p gain to 22p.

Prism Rail ventured 35p ahead to 490p and the market's latest football recruit, Secure Retirement (to be renamed Southampton Leisure) jumped 104p to 150p as the Saints marched in through a classic reverse takeover.