The UK equity market's rehabilitation after last Friday's 125-point slide was taken a stage further yesterday. Big gains in London were similar to those across other European markets, which registered their relief that the US Federal Reserve had decided to leave rates on hold. The Fed decision had seen the Dow Jones Industrial Average post its second consecutive three-figure gain, almost retrieving the 247-point loss recorded in the US on Friday.

At the finish of a brisk trading session, the FTSE 100 index showed a 44.2 gain at 4,958.4, a two-day rally of 123.4 points.

There was a much less convincing performance from the market's second liners, with the FTSE 250 index only managing a 6.6 rise to 4,687.4.

A long list of stocks including many engineering companies were hit by worries about sterling. The FTSE SmallCap index, however, continued to make progress, finishing at a high of 2,250.9, up 11.3.

Turnover picked up from the depressed levels seen on Monday and Tuesday when the institutions had backed away from the market awaiting the Fed news.

At the 6 p.m. reading, turnover was 775.7 million shares, compared with Tuesday's 694.9 million and Monday's 595.5 million. The latter was the lowest daily turnover for some months. Marketmakers were slightly surprised at the increase in business.

One said he welcomed the increase in liquidity but he warned that the market would be wrong to get too complacent with the recovery in London and Wall Street in the past couple of sessions.

"There is precious little support above 5,000 on the FTSE 100 and we're still in the middle of the summer holiday period. It's too early to say we've ridden out the storm," he said.

Equities derived some support from the early strength in gilts, which moved modestly higher shortly after the opening and immediately after news of retail sales and M4 money supply for last month.

The retail sales figure came in up 0.3 per cent, compared with a consensus forecast of 0.4 per cent, while M4 expanded by 0.8 per cent, slightly above the consensus forecast of 0.7 per cent.

Some economists voiced concerns about the year-on-year rise in sales momentum.

"It is impossible to believe the Bank of England will be comfortable with annual retail sales running at 6.5 per cent, the highest level since July 1988 and the highest in the world at present.

"Furthermore, in the three months to July sales were up 9 per cent annualised on the previous three months," said Mr David Bloom at HSBC James Capel.

Wall Street behaved erratically at the start of trading in the US yesterday, slipping before rising over 30 points not long into the session.