Sterling has bounced off its lowest point in more than three decades, steadying a little after turmoil triggered by Britain’s decision to leave the EU.

UK shares started trading in London on a firmer note while futures markets were signalling opening gains for US stocks.

After a battering following the EU referendum result, the FTSE 100 rose 2.4 per cent in late-morning trade, with financial stocks making prominent gains. Domestic retail stocks also bounced back. The FTSE 250 share index, considered a better benchmark of the underlying UK economy, was 2.4 per cent higher.

The pound rose 1 per cent on the session to $1.3343, reducing its decline against the dollar since the start of trade on Friday when the result of the referendum became clear, to 10.1 per cent. The yield on 10-year UK Gilts ticked higher, moving back to 1 per cent from 0.93 per cent as demand for haven assets eased across global markets.

David Cameron has arrived in Brussels for a final, painful summit as UK prime minister, where he will urge European leaders to learn the lessons of Britain’s referendum and give his analysis of the Brexit vote at a summit dinner.

European leaders hope to push ahead with formal negotiations and Downing Street expects Mr Cameron’s successor to come under heavy pressure the moment they take office.

Populist

With populist and anti-EU sentiment rising across Europe, the UK prime minister is also expected to warn that many British voters felt alienated by a remote elite in Brussels pursuing an apparently relentless project of integration.

On Wednesday, Mr Cameron will be asked to leave the summit while the remaining 27 members hold informal talks on how to approach Brexit negotiations and how to stop them stretching out over many years.

George Osborne, the chancellor, has warned that spending cuts and tax rises lie ahead in the wake of the EU membership referendum, noting that the country will be “poorer” as a result of the vote.

Mr Osborne on Monday backed away from plans for an emergency Budget, saying that a new prime minister needs to be in place first. But a dent to the economy is unavoidable.

“We are in a period of prolonged economic adjustment for the UK,” he said in an interview on BBC radio. He added: “We are absolutely going to have to provide fiscal security to people, we are going to have to show the country and the world that the government can live within its means.”

Asked if that meant tax rises and spending cuts, he said: “Yes, absolutely.”

Angela Merkel, German chancellor, warned the UK that there will be no “cherry picking” in its Brexit negotiations in her toughest response yet to the Leave campaign’s hopes of securing access to the EU’s internal market while limiting freedom of movement.

In a firm speech to the Bundestag, Ms Merkel spelt out the EU’s internal freedoms were indivisible: if Britain, like Norway, wanted access to the internal market then, like Norway, it would have to accept freedom of movement, she said.

Clarification

Jean-Claude Juncker, president of the European Commission, urged the UK to “swiftly” clarify its position regarding its plans to break from the EU, warning that the bloc cannot be “embroiled in lasting uncertainty”. He also hit back at criticism of him in some parts of the British press, claiming he is not a “faceless bureaucrat” and “would like to be respected”.

Luxembourg prime minister Xavier Bettel warned that the UK’s choice was binary: “Married or divorced, but not something in between.” He added: “We are not on Facebook, with ‘It’s complicated’ as a status.”

Nigel Farage, the leader of the UK Independence party, was booed in the European Parliament as he called on the EU to take a “grown up and sensible” attitude to negotiations with the UK.

He was speaking at a special session of the European Parliament to discuss the result in the EU referendum. He claimed the result will offer a "beacon of hope" to "democrats" across Europe and predicted: "The UK will not be the last member state to leave the European Union. "

Mr Farage added: “When I came here 17 years ago and said I wanted to lead a campaign to get Britain to leave the European Union, you all laughed at me. Well I have to say, you’re not laughing now are you?”

On the London stock market, Prudential rose to the top of the FTSE 100, with a bounce of 10.4 per cent. Shares in the London Stock Exchange regained 5.8 per cent, while Lloyds Banking Group rose 4.9 per cent while Barclays gained 6 per cent. Housebuilders, some of the biggest fallers in the sell-off after the Brexit vote, also made prominent gains. Among them, Taylor Wimpey was up 4.9 per cent.

In Frankfurt, the Xetra Dax 30 rose 1.9 per cent to 9,444.95. The CAC 40 in Paris was 2.2 per cent stronger, while the region-wide Euro Stoxx 600 rose 2.4 per cent.

European banks continued to recover as the trading day developed, with some of the biggest rebounds coming in Italy. Shares in UniCredit rose 5.2 per cent, while Intesa Sanpaolo was up 6.6 per cent. Deutsche Bank was 4 per cent stronger, while in France Crédit Agricole rose 5.9 per cent.

Leader

Meanwhile, Mr Cameron’s successor as Conservative leader and prime minister should be elected by September 2nd, senior Tories have announced, in a fast-track contest that is likely to help Boris Johnson in his bid to reach Number 10.

Nominations for the new leader should open on Wednesday evening and close on Thursday lunchtime, a tight timetable giving little time for low-key candidates to gather support among MPs or Conservative grass roots supporters in the country.

Mr Johnson, the former London mayor and leading Eurosceptic campaigner, and Theresa May, home secretary, are the frontrunners in the contest.

However, Stephen Crabb, the work and pensions secretary, received a boost when Sajid Javid, his cabinet colleague and business secretary, backed him last night. Mr Crabb has offered him the post of chancellor were he to win. Mr Osborne has ruled himself out as a candidate.

In the opposition Labour party, the continued unravelling of the shadow cabinet has so far failed to dislodge Jeremy Corbyn as leader, despite the resignations of 46 members of his front bench and an expected vote of no-confidence from the vast majority of his MPs.

Mr Corbyn is facing the biggest rebellion against a party leader in modern UK history, brutal in its scale and determination, yet he has refused to budge. Propped up by a hard core of loyal MPs and by the unions, he said on Monday that he would not leave until he was defeated in a leadership contest.

The Scottish parliament will on Tuesday afternoon debate the implications of Brexit and is expected to pass by a hefty margin, a motion intended to strengthen the hand of Nicola Sturgeon in the first minister’s negotiations with UK and EU authorities.

Meanwhile, Sadiq Khan, who was elected mayor of London in May, has called for more powers for the capital in the wake of the EU referendum, saying it needs “more autonomy in order to protect London’s economy from the uncertainty ahead, to protect the businesses from around the world who trade here and to protect our jobs, wealth and prosperity”.

– Copyright The Financial Times Ltd