The FTSE 100 share index closed at a new peak of 6,415.3, up 85.3 points on the day, with traders buoyed by the record high achieved by the Dow Jones on Monday. The Footsie also hit a new intra-day high of 6,443.9, easily beating the old intra-day record of 6,399.1 set only last Thursday.
The surge, on the first day of the Monetary Policy Committee's two-day session, came as the housing market showed its strongest signs of recovery for months.
The Halifax reported a 1.2 per cent jump in house prices in March, all but banishing fears of a slump in 1999.
The strength of the pick-up prompted some experts to warn of the danger of another 1980s-style boom-and-bust cycle if the Bank of England goes too far in cutting interest rates.
The price of the average British home rose last month to pounds 73,836, according to the Halifax figures. This returned the housing market to its peak level before November last year.
The recovery means that yearly house price inflation is now running at 4.4 per cent, on the lender's figures. Last month it was just 3.6 per cent.
The Halifax survey adds to growing evidence of a recovery from other sources. Nationwide reported a 1.5 per cent pick-up in house prices last week. In March, the number of estate agents and surveyors reporting price rises was at its highest for more than a year, and builders have reported growing demand for new sites.
Yolande Barnes, of FPD Savills, the premium property consultants, warned yesterday: "If homeowners feel they are in good financial shape - as the signs are that many do - we could be about to see the start of speculative activity. We have not necessarily escaped the boom-bust mentality."
But others worry that the economy is still not strong enough to support a sustained recovery. Martin Ellis, senior economist at Halifax, said: "The rise is patchy, and in some parts of the country prices have not moved."
Firm expectations of another interest-rate cut from the Bank of England helped fuel the surge in stock prices, analysts said. Most City economists believe the Bank will tomorrow reduce rates by a quarter-point to 5.25 per cent, despite fresh signs of reviving confidence.
On the foreign exchanges, the rate-cut hopes sent the pound tumbling to an 18-month low against the dollar of $1.585. Neil Parker of Royal Bank of Scotland said: "The market is fully pricing in a rate cut."
Few analysts thought that growing signs of economic optimism - revealed by three business surveys out yesterday - would deter the Bank from making its sixth interest-rate cut in seven months.
The Confederation of British Industry/Deloitte & Touche survey of services pointed to a sharp jump in optimism in the sector, while the Institute of Management said confidence among British managers had risen for the second successive quarter. The BDO Stoy Hayward "poll of polls" for April also found evidence of a recovery in optimism.
This week could also see rates fall in the euro zone, say analysts, with the European Central Bank due to meet tomorrow. Several City economists believe the ECB could trim rates amid growing fears about the economic outlook in Germany, Europe's largest economy. Others, though, said the buoyant economic position elsewhere in the euro zone would convince the ECB to hold its fire. A survey revealed that French consumer confidence remained at a record high level for the second consecutive month, while the Reuters/NTC Purchasing Managers Index suggested that the pace of the decline in European manufacturing had begun to slow.Reuse content