The FTSE 100 index of blue-chip shares ended the year 16.7% higher at 5,618.8, buoyed by soaring commodity prices and a flurry of takeover activity.

Housebuilder Persimmon was the best performing share in the index, gaining 82% on the back of rising house prices.

Experts believe that the market will perform strongly again in 2006 and could near the 6,000 mark.

Dash for energy

This year was the best for the stock market since the height of the dot.com boom in 1999, where share prices rose 17.8%.

Equities outperformed the housing market for the first time since 1999, hitting a four-year high in recent days.

The market was propelled by feverish global demand for oil, which boosted shares in energy giants such as Shell and BP.

The market has clearly had a very strong year and mergers and acquisitions have been a key component behind that Ralph Brook-Fox, Britannic Asset Management

The rising price of gold, copper, iron ore and other commodities boosted the performance of mining companies such as BHP Billiton, Anglo American and Rio Tinto.

A marked increase in takeover activity also sent shares upwards.

High-profile deals included Telefonica's �17.7bn takeover of O2 and the �3.3bn buyout of P&O by Dubai Ports World.

Significant flotations, such as online gaming firm PartyGaming and Russian mining business Kazakhmys, gave the market added impetus.

More deals

Analysts said they expect a high level of merger and acquisition activity in 2006 as many leading companies are sitting on large cash piles.

"The market has clearly had a very strong year and mergers and acquisitions have been a key component behind that," Ralph Brook-Fox, an investment manager at Britannic Asset Management, told Reuters.

Telecoms firm O2 was at the centre of takeover activity

"One would expect that the deal flow will continue into the new year and that will continue to give some decent support to the market."

Among the companies which performed strongly this year were engineering firm Rolls-Royce and defence group BAE Systems.

However, shares in many retailers took a tumble as the slowdown in consumer spending made life tough on the High Street.

Kingfisher, owner of B&Q, was the worst performing share in the FTSE 100, slumping 23%.

Despite its robust growth, the FTSE was outperformed by other global stock markets.

Germany's benchmark Dax index recorded 27% year-on-year growth while Japan's core Nikkei 225 index soared 40%.