The FTSE 100 index was up 132.07 points, or 2.4 percent, at 5,767.66 by the close.

Leading U.S. lawmakers expressed confidence on Sunday that a deal would be reached to avert the $600 billion 'fiscal cliff' of tax rises and spending cuts which could tip the world's biggest economy into recession.

This followed a late rally on Wall Street on Friday after leaders of the U.S. Senate and House said they would find common ground over their policy differences.

There was obviously a great deal of worry over what was perceived to be a prolonged debate (over the fiscal cliff), but the statements from [U.S. President] Obama and [Treasury Secretary] Geithner on Friday helped the markets out, said Zeg Choudhry, head of quities trading at Northland Capital Partners.

We definitely got oversold. It remains to be seen as to whether or not we will hold a rally. It's a very good rally, 2 percent, and we should get another push again tomorrow, as long as Wall Street holds up.

Monday's riise came after after a 1.3 percent drop on Friday took last week's falls to 2.8 percent in total. This was its steepest weekly decline since May, bringing the index hit a three and a half month low and erasing nearly all its gains since ECB President Mario Draghi said he would do whatever it takes to save the euro.

On Monday, it closed above 5726, significant from a technical standpoint as it is approximately both the 200 day moving average and a 38.2 percent retracement of the fall from a peak on November 9 to a trough at the end of last week.

The rebound was broad-based, with every sector contributing to the index's rise, although the most economically sensitive stocks such as commodities and banks , led gains. Financials, which include banks, insurers and brokerages, added nearly 40 points to the index.

Barclays was the biggest gainer, adding 6.7 percent, as it received a boost after Goldman Sachs raised its price target for the bank.

Heavyweight HSBC, added 16.5 points to the index, rising 3.8 percent after the bank said it was in talks to sell its $9.3 billion stake in China's Ping An Insurance under a plan to shed non-core parts of its business to boost profitability.