At 12.40, the FTSE 100 had risen to 5397.05, up 5.35 per cent. The rally was led by the banking sector with Lloyds, Royal Bank of Scotland, Barclays and Standard Chartered all seeing double-digit share increases since the market opened.
There had been concerns in some quarters about a further FTSE wobble due to a continued lack of clarity over a future UK coalition Government.
The European loan-guarantee deal will see all 16 members of the Eurozone given access to 440bn euros of loan guarantees and emergency European commission funding of 60bn euros. The International Monetary Fund will also contribute up to 250bn euros.
Other European markets have also bounced on the news with the German Dax rising almost 5 per cent in the French Cac 40 up over 9 per cent. at 12.40.
The FTSE 100 rebounds comes after 7.75 per cent fall last week amid the concerns.
Schroders European economist Azad Zangana says: “In our view, the actions announced over the weekend tick all the boxes and make an explicit statement to markets that European governments are prepared to go to extraordinary lengths to defend the single currency union. At the time of writing, the EuroStoxx 50 index is up just under 9 per cent on the day, while ‘normality’ (upward slope) has returned to government bond curves of peripherals.
“However, the structural problems within the weaker Eurozone members remain and serious repair work is now needed to restore credibility to Europe’s fiscal framework. We expect tougher new rules on fiscal management to follow with stricter implementation of the excessive deficit procedure. There is still the thorny issue of the conditions to be attached to the support.
Zangana warns that there is still a large chance that Greece, as well as Portugal and Spain, may not be able to implement all of the fiscal tightening measures required, but says the Eurozone members may soften support loans rather than letting them solve their own problems internally.
He says: “If any doubt remains, the 860bn of aid announced so far is large enough to bailout Greece, Portugal and Spain over three years twice over. A very bold move in the face of potential catastrophe.”