London's blue chip index rose 109.11 points, or 1.9 percent to 5,790.72. Although the index closed below 5,800, where traders said they were seeing some technical resistance.

Banks were the top gainers as talk among traders was that a debt-swap deal for Greece could be imminent, although no fresh news leaked out into the ether.

The strength of this market at present suggests that traders remain relatively optimistic that some sort of deal between Greece and its creditors can be hammered out, said Ben Critchley, a sales trader at IG Index.

Private sector creditors of Greece could take a loss of more than 70 percent, while Greek finance minister Evangelos Venizelos said the country was one formal step away from closing a deal with private bondholders to restructure 200 billion euros ($262 billion) of debt.

A deal for the debt-laden peripheral euro zone country would avoid a messy default that could prove catastrophic for the financial system.

Lloyds Banking Group and Barclays rose 5.2 and 5.4 percent, respectively, and the feelgood factor spread to the bond market as yields on government debt in Portugal, which investors believe will be the next country to need a bailout, fell after its latest auction.

Shares in asset managers Man Group and Schroders climbed 5.2 and 8.7 percent, respectively, as a deal for Greece would remove some of the uncertainty which has dented markets and exacerbated fund outflows.

The uncertainty in the euro zone and the subsequent constraints on market liquidity have hit profits at ICAP , but the interdealer broker rose 7.7 percent after it announced job reductions and cut its full-year forecast toward the upper end of analyst forecasts.

Valuation also played a part, with ICAP currently trading on a 12-month price to earnings (PE) of 8.7 times and down 3 percent in 2012, compared to the FTSE 100 on a PE around 10 times and up 2 percent this year, according to Thomson Reuters Starmine data.

Oriel Securities said the shares look oversold despite the earnings risks given its PE and dividend yield around 6.3 percent.

EARNINGS BOOST

Investors continue to reward companies that have the capability of increasing earnings in an austere economic environment.

Rolls-Royce added 4.8 percent as BofA Merrill Lynch raised its earnings estimates and target price for the engines manufacturer.

BofA Merrill Lynch said Rolls-Royce has structural long-term advantages over its peers which are not fully priced in at current levels, and lifted its full-year 2012-2013 earnings per share estimates by 4-6 percent.

Heavily shorted Ocado rose 12.7 percent after the British online grocer forecast first-quarter sales growth of about 10 percent, easing concerns about its prospects after a profit warning last month.

Johnson Matthey gained 5.3 percent after the world's largest supplier of catalytic converters said its second-half earnings would be slightly ahead of the first six months.

That prompted BofA Merrill Lynch to raise its EPS forecasts and lift its price target 14 percent to 2,150 pence.

Miners powered higher too after January manufacturing Purchasing Managers' Index figures from China, Europe, the UK and the U.S. showed some signs of recovery, lifting the outlook for demand in the sectors.

On the downside, investors banked profits in ARM Holdings , down 2.8 percent after its shares rose on the back of Tuesday's bullish update.