Share indices in Germany, Holland, Belgium and Denmark hit record highs after Tokyo's benchmark Nikkei 225 index rose 0.79 per cent on hopes that the next Japanese government would cut taxes to revive the economy. The rally accelerated as US treasuries and stocks rose following the release of US inflation data, which showed the consumer price index increased by 0.1 per cent in June against expectations of 0.4 per cent increase.

The Dow Jones Industrials was up 17 points at 9113 soon after Wall Street opened. "It shows once again that inflation is dead in the water," said Hildegard Zagorski, a market analyst at Prudential Securities in New York. The UK blue-chip index, already higheron a weak British inflation report, reached its best levels for the day after the US data. FTSE 100 rose more than 2 per cent to 6086.1, its highest in three months and less than 70 points short of its all-time best.

News that Britain's underlying annual inflation rate fell to 2.8 per cent in June, the lowest in three months, boosted government bonds and buoyed sterling interest rate futures to levels that showed the market now believed rates had plateaued. Sterling fell to a month-low of 2.9425 marks. "I don't think there is any doubt that inflation has peaked," said Glenn Davies, chief UK economist at Credit Lyonnais. "There's less chance of another rate hike." That prospect spurred financial stocks, whose performance is sensitive to swings in interest rates.

Banking stocks also helped the Dutch and Belgian indices to record highs and powered gains in Italy and Spain. The gains were underpinned by a steady yen, which rallied to 140.30 to the dollar from around 141 late on Monday in Europe as investorscontinued to mull the resignation of Japanese Prime Minister Ryutaro Hashimoto. Dealers said the absence of significant news overnight kept the dollar to narrow ranges against major currencies. Trade could be choppy until Japan announces the successor to Hashimoto, they said.

"The market wants to get a better sense of who the next prime minister will be before they take this outside of the recent trading range," said Ben Strauss, vice preident at Bank Julius Baer. A cacophony of calls for Japanese reforms over the last two days could presumably maintain pressure on Japan to at least keep the process on track, if not accelerate plans, analysts said. The mark was firm against major currencies as investors assessed the impact of Monday's deal on financial aid for Russia.

International lenders threw Russia's economy a $22.6 billion lifeline in a vote of confidence in the government's plans for dealing with an acute economic crisis. Russian share and debt prices leapt on the announcement, which gives thegovernment breathing space as it struggles to service its debt and stave off a possible rouble devaluation. Russia's main stock market suspended trade after the late afternoon index calculation showed a 16.84 percent rise for the day, triggering a circuit breaker.