The blue-chip FTSE 100 closed up 0.1 percent, or 7.23 points higher, at 5,921.63 points - its highest close since finishing at 5,961.11 points on March 19.
The FTSE initially fell after Italian Prime Minister Mario Monti said over the weekend that he planned to resign, increasing political uncertainty in the heavily indebted country and probably bringing forward elections to February.
However, it then pared those losses and gained ground after breaking through and holding above the technically important level of 5,910 points - a level where it had previously tended to fall back.
Traders said fund managers would still look to put money in equities before the year-end, with stocks offering better returns via dividends than cash or sovereign bonds, where returns have suffered with interest rates at historic lows. JN Financial senior trader Rick Jones said he would use any fall in the market to buy shares on the cheap, since he expected the FTSE could end 2012 at 6,000 points.
"I do think there's a bit of a magnet pulling the market towards 6,000 points," he said.
Stockbroker Killik & Co expected the FTSE to end 2013 at 6,500 points, despite the euro zone debt crisis and worries over the U.S. "fiscal cliff" - a potential combination of tax rises and spending cuts in the U.S. - and the risk of a slowing Chinese economy.
"Although concerns remain over eurozone sovereign debt issues, the U.S. 'fiscal cliff' and the outlook for the Chinese economy, we believe these headwinds will be outweighed by positive factors such as strong corporate balance sheets, a reasonable valuation and an attractive dividend yield," Killik partner Paul Kavanagh wrote in a research note.
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Healthcare company Smith & Nephew topped the FTSE 100 leaderboard with a 1.9 percent gain, after Investec raised its rating on Smith & Nephew to "buy" from "hold".
Major mining stocks such as Rio Tinto also contributed to much of the FTSE's gains, with the FTSE 350 mining index gaining 0.3 percent.
Oriel Securities strategist Darren Winder said UK miners could be on track for a strong 2013, and traders added that economic growth in China - the world's top metals consumer - would boost miners' prospects.
Securequity sales trader Jawaid Afsar said he was considering buying mining stocks and felt the FTSE 100 would have a traditional year-end rally with fund managers allocating more money to equities as they close their books for 2012.
"There are a lot of fund managers who are underweight on equities, and they'll be looking to put their money to work," he said.
Others were more cautious, due to the uncertain economic outlook.
Hartmann Capital trader Basil Petrides recommended that investors book profits on the back of recent gains on equities, with the FTSE up around 6 percent since the start of 2012.
"If you've got profit on the table, it should be banked," he said.