By close of trade yesterday, the FT-SE 100 index closed 19.5 points higher at 3883.2, a rise of 0.5 per cent.
Traders said the increase was based on high hopes for a continuing housing market boom.
Their views were bolstered yesterday by the regular monthly survey from the Building Societies Association, which showed that net mortgage lending in July was pounds 1.2bn, some 7 per cent higher than the previous month.
Even more significantly, new mortgage commitments, the number of loans which societies expect to make in about two months' time, were 53,000, the highest since March 1994 and 40 per cent up on a year ago.
Ron Armstrong, deputy director general at the BSA, said: "Comparisons with 1995 are encouraging with net advances 68 per cent higher than a year ago. Other housing market indicators look promising for future growth in the market. Transactions have been increasing and house prices are also rising."
Jonathan Loynes, UK economist at HSBC Greenwell, said: "The underlying trend is clearly upward. The next few months should see a strong increase in activity."
But Mr Loynes also warned of a potential slowdown in the run-up to the general election next year.
Analysts were also encouraged by figures showing that M4 - the broad measure of money supply, including notes and coins in circulation, personal and commercial bank deposits - slowed to 8.8 per cent in the year to June, according to the Bank of England. Seasonally adjusted M4 grew 0.4 per cent in July from June, down from 0.7 per cent in June.
Lending by banks and building societies continued to increase.
The slowdown in money supply growth from annual rates of 10 per cent in May and June brought the figure back within the government's 3 to 9 per cent monitoring range for the first time since last November
However, the British Bankers' Association said there was a pounds 539m increase in consumer credit in July, while lending by major banks overall rose pounds 2.67bn in July
Andrew Cates, an economist at UBS, the Swiss banking group, said: "The strength of consumer credit and housing market activity within the lending figures will be seized upon by the Bank of England as a potential threat to the inflation target."
Strong money supply growth is often seen as a pointer to future inflation and Eddie George, Governor of the Bank of England, has warned that interest rates might have to rise if it continues without being checked.
Markets were also boosted by expectations, later confirmed after trading had finished, that the US Federal Reserve would leave interest rates unchanged, and a Bundesbank cut in German rates helped the FT-SE 100 to its second record high in three days.
Further evidence of the return of the consumer feel-good factor, highlighted by unexpectedly strong results from Argos on Monday, gave the retail sector a push.
Analysts said such strong growth from a relatively stable performer augured well for more cyclically sensitive stores groups.
Another factor acting in the market's favour, according to analysts, was the perception that UK fund managers were sitting on uncomfortably high amounts of cash that would eventually be allocated to UK equities.
"Fund managers are getting very twitchy about having so much cash on their hands, and they're going to have to come into the market sometime," said Nick Parsons, a trader at Societe Generale Strauss Turnbull.Reuse content