The FTSE closed up 122 points, or 3.4%, at 3,689, its biggest rise in three months.

Markets 1730 GMT

FTSE: +3.4% Dax: -0.12% Cac: +0.68% Dow Jones: +0.68%

Financial stocks in London soared on news the Financial Services Authority (FSA) is to consider easing its solvency rules for insurers.

At the close, insurer Aviva had increased 9.5% , while Royal & Sun Alliance gained 7.7% and Friends Provident rose 11.3%.

Stocks in London were also boosted by a positive opening on Wall Street, where the Dow Jones index was up 54 points, or 0.7%, to 8,108 in the first hour of trading.

Space Shuttle

American stocks were led higher following good news on company profits, although shares in companies involved with the US space-shuttle programme were trading down.

Boeing and Lockheed Martin, both principal contractors to the space programme, both lost 2% of its value following the break-up of the shuttle Columbia and death of its seven-member crew on Saturday.

The FSA's announcement it would consider bending solvency rules also benefited the banking sector, with strong performances from Lloyds TSB and Abbey National.

This relieves some of the biggest pressure elements in the market but there will still be concerns about economic data and the timing of war Henk Potts strategist at Barclays Private Clients

Both banks have insurance divisions.

Last month was one of the worst Januarys in the FTSE's history.

The blue chip index fell an unprecedented 11 sessions in a row as life insurance and pensions companies dumped shares to give their solvency ratios a much-needed boost.

Investment bank Goldman Sachs said the FSA's decision "creates good buying opportunity" in the life sector and provided a boost to the market as a whole.

Rules relaxed

FSA solvency rules are designed to protect investors by ensuring life insurers have comfortably enough to pay what they have guaranteed to customers.

The FSA is putting more pressure on companies to ensure they have adequate financial resources to manage risks

Click here for more on the rules for insurance firms

They must have 4% more in their coffers than whatever they have guaranteed to pay out.

If not, they may be forced to start selling shares, leading to a downward spiral in share prices.

Relief

The FSA's decision to relax its rules - if it believes a company's finances are fundamentally sound - has been welcomed by investors.

But some analysts predicted Monday's rally could be short-lived.

Henk Potts, strategist at Barclays Private Clients, said: "This relieves some of the biggest pressure elements in the market but there will still be concerns about economic data and the timing of war.

"The reality is that the FSA had to move in to break this vicious circle, otherwise it could have ended in disaster."