UK and US stock markets soared after upbeat manufacturing data and positive earnings news from big British banks helped stoke a renewed bout of buying.

The FTSE 100 index of leading shares closed at 4,682.46 points, its highest closing level since early October 2008. Earlier in the session, it hit a fresh intraday peak above the 4,700 , its highest level since the collapse of Lehman, after Barclays and HSBC reported a combined £6 billion in profits for the first six months of the year and the manufacturing sector returned to growth for first time since March last year.

Wall Street continued its rally this morning on the back of a slowdown in the decline of manufacturing activity last month.The S&P 500 moved above 1,000 points for the first time since last November after the Institute for Supply Management said that its manufacturing index gave a reading of 48.9 in July, up from 44.8 in June and far better than the 46.2 expected by economists. A reading of less than 50 indicates that the manufacturing sector is contracting.

The S&P rose 1.53 per cent to close at 1,002.63. The index last breached 1,000 on November 5, the day after the US Presidential election.

Other US markets extended gains made last week. The Dow Jones industrial average rose 1.25 per cent, to 9,286.56 and the Nasdaq composite index rose 1.52 per cent, to 2,008.61, above 2,000 for the first time since early October.

Investors' optimism received a further boost when the Commerce Department said that there had been a rise in spending on residential building during June, which lifted overall construction spending by 0.3 per cent, up for the second time in three months.

In the UK, Barclays rose 6.7 per cent after reporting an 8 per cent rise in profits for the first half of the year, HSBC added 4.98 per cent, after also revealing a profit despite a 57 per cent fall in earnings.

At the same time, British manufacturing grew for the first time in 16 months during July, boosted by the fastest flow of new orders since November 2007.

Miners also made strong gains on the back of two surveys from China showing an acceleration in factory growth during July thanks to a revived domestic economy and slight pick-up in demand for exports. Xstrata gained 7.09 per cent and Rio Tinto rose 4.86 per cent while Anglo American closed up by 4.82 per cent.

Even, Legal & General managed to rise by 1.24 per cent, reversing earlier falls ahead of its interim results tomorrow amid speculation it may cut its dividend again and be forced into a share issue to rebuild its capital reserves.

The biggest gainer in the blue chips was Petrofac, the oil services group, which builds oil rigs. The group rose 10.2 per cent after UBS upgraded to buy from neutral, saying that its $6 billion in contract wins so far this year showed its growth potential was undimmed by the lower oil price.

"We believe the company is likely to be able to maintain its industry-leading margin level on these contracts, and our review of upcoming tenders suggests there remains substantial room for further growth. The stock is one of the cheapest in the sector," UBS said, and raised Petrofac's price target to £10 from 610p.

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