The FTSE 100 ended the day up 79.9 points - 1.5 per cent - at 5,438.4 on hopes of lower interest rates and an imminent International Monetary Fund (IMF) package for Brazil.
All major European bourses closed higher, while in New York - where sentiment was also boosted by surprisingly resilient economic figures - the Dow Jones Industrial Average closed up 97.07 points at 8,592.1.
The dollar rose against the mark, while bond markets, led by US Treasuries, fell as traders bet that the current crisis could be past its peak.
Speaking in London the Chancellor, Gordon Brown, said there were signs that the world economy was stabilising.
He said: "I think in some countries in Asia there are signs of a return which was not there a few weeks or a few months ago."
The statement released jointly by the G7 central bankers and finance ministers backed a US plan for a new emergency funding facility based within the IMF and welcomed moves by the Japanese government to clean up its banking system.
Mr Brown boosted hopes that an IMF rescue package for Brazil would soon be agreed, saying: "We welcome the policy commitment by the government of Brazil, and state we will work with the international community to support them."
Ken Wattret at Paribas said: "Brazil is the major focus for the equity markets at the moment."
Analysts believe a rescue package for Brazil could be announced within days.
Markets were also boosted by hints of further reductions in world interest rates. The Bank of England's Monetary Policy Committee next meets on UK interest rates on Wednesday, with its decision due on Thursday. Most analysts expect the Bank to cut rates, probably by a quarter point.
The G7 statement was not the only factor in yesterday's equity market surge.
Better-than-expected US Gross Domestic Product (GDP) figures also helped sentiment. The US economy grew by 3.3 per cent in the third quarter, faster than expected and well ahead of the 1.8 per cent recorded in the second quarter.
The figures show that America's healthy mix of low inflation and strong growth is surviving, with inflation at a record low of 0.8 per cent annually.
Exports continued to fall and imports surged, but the impact of the Asian crisis on US trade was less than in the first half of the year. The figures were heavily influenced by a rundown of stocks in the second quarter and an accumulation of inventories in the third, and by the end of the General Motors strike.Reuse content