The FTSE 100 index set a record, ending nearly 42 points higher at 4,307.8. It was the second record-breaking day this week, and analysts immediately started looking forward to passing the next psychological barrier at 4,400.
In New York, the Dow Jones Industrial Average closed up 84.67 points at 6,857.73 after registering a 77-point gain by midday. Technology stocks, led by IBM and Intel, were particularly strong. The New York Stock Exchange had imposed its curbs on automatic trades within 10 minutes of opening.
Figures showing a somewhat smaller-than-expected rise in non-farm jobs last month and a dip in average hourly earnings were read by the financial market as a vindication of the Federal Reserve's decision not to raise the cost of borrowing earlier this week.
Hugh Johnson, chief investment officer at First Albany, said: "It's hard to beat the combination of strong job growth and little or no inflation. Relief has touched all markets."
Both countries' currencies made fresh gains yesterday. The pound ended more than two pfennigs higher at DM2.7155, while its index against a range of currencies was up 0.4 at 97.2.
It fell slightly in value against a strong dollar. The US currency reached its highest level against the yen for four years, at 124.71, although it fell back later when Treasury Secretary Robert Rubin warned that exchange rates would be top of the agenda for discussion at today's meeting of G7 finance ministers in Berlin.
The trigger for yesterday's stock market gains was the news that the number of people on non-farm payrolls had climbed by "only" 271,000 in January. Employment rose across the board with the exception of a very slight dip in the construction industry.
The biggest growth was in services, where there was an unexpected increase of 88,000 in temporary workers. The unemployment rate edged up a fraction to 5.4 per cent, but it has now been below 6 per cent for more than two years.
Of more interest to the financial markets was the fact that average hourly earnings were only a cent higher, at $12.06, after sharp rises adding up to 15 cents in November and December. In addition, average hours worked declined from 34.8 to 34.1.
Although the market reaction was entirely favourable, some economists saw the figures as evidence that the economy was still picking up speed. Past figures were revised up, while the drop in hours worked was probably due to unusually severe weather.
"The domestic economy is strengthening. The market rose today because the number was lower than the Street's inflated expectations, not because it genuinely points to a slowdown," said Ian Sheperdson, chief economist for HSBC Markets in New York.
Comments from Harvey Hamel, an economist at the Bureau of Labour Statistics, supported this view. He said both earnings and hours worked were trending upwards despite their January dip. Both could rebound next month.
The advance on Wall Street boosted shares in London and the rest of Europe. Investors in the UK were slightly cautious, however, ahead of figures on inflation, earnings and unemployment due next week.
The Bank of England's Inflation Report, due on Wednesday, is also expected to repeat the warning that interest rates will have to rise at some point if inflation is to hit its target over a two-year horizon. But virtually no analysts expect the Chancellor of the Exchequer to raise base rates this side of the general election.
Market report, page 22