World markets were heartened by optimism that the United States can duck the looming package of automatic tax increases and spending cuts.

Britain’s FTSE 100 Index climbed more than 2%, up 132.1 points to 5737.7, having sunk to a two-month low last week on fears that political deadlock will prevent a resolution to the US fiscal cliff.

But reports of positive talks between Republicans and Democrats in Washington have boosted confidence, with the Dow Jones Industrial Average up 1% at the time of London’s close.

Markets in Germany and France also rallied on hopes that another meeting of EU finance ministers on Greece’s bailout programme later this week will be positive.

There was a boost for the euro as a result, with the pound down against the single currency at 1.24 but slightly higher against the US dollar at 1.59.

The biggest FTSE 100 risers were Barclays up 15.55p to 249.75p, ARM Holdings ahead 36p to 747p, Eurasian Natural Resources 12.5p higher at 272.1p and Randgold Resources up 305p to 6655p.

The biggest FTSE 100 fallers were Melrose down 2p to 206.9p, G4S off 1.7p to 242.4p, Pennon 1.5p lower at 598p and Shire down 2p to 1727p.