Top shares began 2006 trading in buoyant mood, leaping to their highest level since mid-2001 as miners like Kazakhmys and oil and gas stocks including BG Group surged ahead in line with firmer commodity prices.
Investors also drew comfort from data showing the manufacturing sector expanding at a slightly weaker pace than expected in December, supporting a widely held belief that the next move for interest rates will be down.
By 11.29 a.m., the FTSE 100 was 53 points, or 0.9 per cent, higher at 5,671.8 points, having earlier hit its best level since July 3, 2001 at 5,675.8. Despite the upbeat start to the year, some analysts expect FTSE gains to be modest in 2006, following a return of 16.7 per cent last year - the best annual FTSE rise since 1999 when the index hit a record high.
"It is a year for modest economic growth and therefore modest earnings growth," said Charles Stanley, economist and strategist Edward Menashy.
Investment bank Morgan Stanley published its 2006 target for the FTSE of 5,600 points and said rising US interest rates, margin pressures and little earnings growth should make investors in UK equities more cautious.
"Investors should focus on true 'non-cyclical' growth stocks and companies that offer a high dividend yield and good dividend growth," its analysts said in the strategy note.
Oil and gas stocks rose as US crude oil prices traded above $61 a barrel in the wake of a dispute between Russia and Ukraine over gas supplies and prices. Russia's state-controlled producer Gazprom cut natural gas supplies to Ukraine on January 1 after the former Soviet neighbour rejected demands to pay four times more for the fuel.
Moscow agreed to restore gas supplies to Europe through Ukraine but the underlying dispute remained unresolved, raising concerns over Europe's dependence on Russian energy. Gas and oil producer BG Group gained 3.2 per cent, while oil heavyweights BP and Royal Dutch Shell added almost 20 points to index gains between them.
Miners such as Xstrata also rallied as gold prices hit a three-week high.
Supermarket chain Sainsbury, which updates the market on third-quarter trading next week, rose 2.4 per cent as investors anticipated a strong festive trading period, dealers said.
"The rumour is that they had a really good Christmas - they have got their figures out on the 12th," one dealer said. Rival Tesco slipped 0.6 per cent.
Mobile phone giant Vodafone added about two per cent after its South African arm Vodacom said it had become the fastest growing network in the firm's stable. Vodafone is raising its stake in Africa's biggest operator by subscribers to 50 per cent from 35 per cent.
Among mid-caps, betting firm William Hill jumped 6.2 per cent after it said its 2005 earnings would not be as bad as it warned in November as the luck of one horse picker in particular began to run out.
Oil and gas explorers in the FTSE 250 advanced after Soco International said it found oil at its well in Yemen.The mid-cap index set a fresh all-time high at 8,871.8 points.