London's key share index, the FTSE 100, managed to come within 70 points of its record high achieved in July last year. At 1252 GMT, the Footsie was up 151 points at 6,108.

German shares are sharply up

Rumours about impending mergers in the telecoms and pharmaceutical sectors boosted a market that had seen a slow start to the year. One dealer, however, warned that the merger news and hope for new UK interest rate cuts could soon be overshadowed by bad economic data. "We may skim across a recession in the UK", he said.

Another one confessed: "We are slightly bemused by this rally. But it is liquidity driven and it doesn't look like its going to stop just yet."

Several surveys published in the new year suggest that British manufacturers are in deep trouble and that the service sector is weakening too. They have fuelled speculation that the Bank of England's Monetary Policy Committee might decide to announce another rate cut either this Thursday, or at its next meeting in February.

Buoyant Europe

On the continent, share markets are still displaying some euro-phoria. On Tuesday, Frankfurt and Paris had seen their share prices slide briefly as investors took some of the tremendous profits gained at the start of the week.

But now they are on the up again, and Paris has reached an all-time high. At 1252 GMT the Cac 40 index of the French bourse was up 97 at 4,297.

Germany's Dax index, meanwhile, managed to deliver another treble point gain of 140 points to 5,392. Car shares were taking the lead and BMW was the top performer, despite the company's repeated denials that it would not merge with another manufacturer.

The Zurich stock market was another strong performer, rising 113 points to 7,658.

The mood of European investors was boosted by a strong recovery of Asia's stock markets and sharp gains the day before on Wall Street.

In Tokyo the Nikkei index gained 235 points to close at 13,468.46, while Hong Kong's key market, the Hang Seng was up more than 3% or 342 points to end trading at 10,233.