Energy stocks and miners led the rally as commodity prices recovered on hopes that the moves to ease the euro zone debt crisis will boost the global economy and improve the demand picture for metals and crude oil. Much more will have to be done in order to regain the trust of investors, but the fact that politicians showed they are indeed capable of finding a compromise, and willing to dig in their heels to respond, has instilled investors with some hope and optimism, at least for now, said Ishaq Siddiqi, Market Strategist at ETX Capital.
While the news from the summit spurred a relief bounce that was more pronounced due to the general expectation that the meeting would disappoint, traders thought the rally could prove temporary given the scale of the euro zone's problems.
The market focus will now shift to a European Central Bank meeting next Thursday, with many in the market betting on a rate cut that would be supportive for equities.
The FTSE 100 index closed up 78.09 points, or 1.4 percent, at 5,571.15 points, but well below its intra-day peak of 5,619.65.
Volume was solid, at 110 percent of the 90-day daily average on the last trading day of the month and of the quarter.
Over the month, the blue chip index has rallied 4.7 percent, but in the second quarter it has fallen 3.4 percent, and is barely changed from 2012's opening level of 5,572.
European equity fund managers in particular appear to be salivating at the value opportunities to be found; they're just waiting for the right time to make their move, Oliver Wallin, Investment Director at Octopus Investments, said in a note.
For us though, until some meaningful and coherent plan is presented, investors would be wise to remain cautious. Any rally is likely to be unsustainable until the structural issues of the euro zone are resolved, Wallin added.
U.S. blue chips were up 2.8 percent by London's close, outperforming the bounce seen in European markets.
UK banks were firmer, with the euro zone news offering some support given the sector's direct exposure to the bloc's sovereign bonds, but underperformed a 4.8 percent leap by their euro zone counterpart.
Lenders' shares were unsettled by news that Barclays , HSBC, Lloyds and RBS have all agreed to pay compensation to customers they misled about interest rate hedging products, following an investigation by Britain's financial regulator, the FSA.
That fresh blow to the sector's reputation came after news on Wednesday of an investigation into the manipulation of LIBOR interbank rates, which saw Barclays charged a record fine and may well cost its CEO Bob Diamond his job.
Barclays, which fell 15.5 precent on Thursday - its biggest one day fall since 2009 - shed another 1.6 percent as Oriel Securities downgraded its rating for the bank to hold from buy, saying the scale of its interest rate derivatives exposure was of concern.
There were only three other blue chip fallers.
UK water firm Pennon - which only joined the FTSE 100 index on Thursday following the deletion of International Power after its takeover - was worst-off, down 1.9 percent as UBS started coverage with a neutral.
Market heavyweight Vodafone lost 0.8 percent, as Jefferies International downgraded its rating for the mobile telecoms firm to hold from buy with a reduced target price of 180 pence, down from 195 pence.