Relief over America's deal to avert a budget crisis sent London's FTSE 100 Index smashing through the 6000 barrier for the first time since July 2011.
The top tier rallied 1.8% higher - up 109.3 points to 6007.1 - after politicians passed short-term measures to prevent the United States careering over the so-called fiscal cliff.
Markets across Europe also powered ahead, with Germany's Dax up 2% and the Cac 40 in France rising by more than 1.4%.
The fiscal cliff agreement, which was sealed just hours before world markets were due to return from the New Year holiday, has staved off a devastating package of spending cuts and tax rises.
Economists feared that without action by Congress, the tax increases and spending cuts that technically took effect on New Year's Day would cause unemployment to surge and send the US economy back into recession.
UK blue chips were also boosted by economic cheer after a closely-watched survey revealed a return to growth in Britain's manufacturing sector and the highest reading for 15 months.
In an unprecedented pre-dawn vote in the House of Representatives, the deal avoided middle-class tax increases and delayed spending cuts for two months while raising tax rates on incomes over 400,000 US dollars (£247,000) for individuals and 450,000 US dollars (£278,000) for couples.
The Bill's passage on a 257-167 vote was a triumph for President Barack Obama after his re-election in November on the back of a pledge to impose higher taxes on the wealthy.
He said the measures were "just one step in the broader effort to strengthen the economy".
The London market has been in limbo in recent sessions as traders pondered the implications of America failing to reach a compromise to avoid the fiscal cliff.
But experts feared the market elation would be short-lived, with America still to agree a long-term package of measures.
Joe Rundle, head of trading at ETX Capital, said: "It's only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues.
"The likelihood that we will see a series of setback in talks, continued political posturing and finger pointing is again set to unnerve investors, prompting huge bouts of volatility in markets."
Banks and London-listed mining groups led the rally on the FTSE 100 in the first session of the new year.
Barclays and part-nationalised Lloyds Banking Group were both 4% ahead in early trading.
David Jones, chief market strategist at IG, said the fiscal cliff cheer was also helping markets capitalise on the traditional "January effect" boost.
Stock markets usually rise in January, as investors who have sold shareholdings in December to book profits and offset losses buy back into the market, creating a new year rally.
Mr Jones said markets tend to have a better-than-average year after a January rise.
This was true in 2012, with the FTSE 100 ending the year up 6% after a buoyant first month of trading.
- More about:
- Barack Obama
- Hong Kong
- Houses Of Representatives
- United States Congress
- World Markets