The blue-chip FTSE 100 <.FTSE> index was up 0.5 percent at 7,253.28 points, joining a broader rally in risky assets across European bourses.
Last week a surge in sterling to its highest level since the Brexit vote sent the FTSE 100 to its lowest since the end of April, as its predominantly international, dollar-earning firms were hit.
On Monday the pound eased back, extending losses after afternoon comments from Bank of England governor Mark Carney reiterating that the central bank would raise rates in the coming months, but adding that hikes would be limited and gradual.
Sterling's slide boosted the FTSE to end at a session high.
"The prospect of a softer Brexit and rising expectations of an interest rate hike could lead to a further appreciation of the GBP against the EUR. Conversely, a stronger GBP is weighing on UK equities," analysts at Credit Suisse Wealth Management said in a note.
"We remain negative on UK equities given their high overseas exposure."
Financials, which tend to be more volatile than other sectors, added the most to gains, with shares in HSBC (>> HSBC Holdings), Standard Chartered (>> Standard Chartered) and Barclays (>> Barclays) gaining 0.5 percent to 1.6 percent.
Other cyclical sectors, such as energy, also rose, with heavyweights BP (>> BP) and Royal Dutch Shell <RDSa.L> both up 0.7 percent as oil prices hit $50 per barrel. [O/R]
Defence firm BAE Systems (>> BAE Systems) was among the biggest individual risers, jumping 4.2 percent after Qatar signed a deal to buy 24 Typhoon aircraft from the company.
"We believe the market was not expecting a Qatar order for Eurofighter – considering its previous orders for Rafales and F-15 military jets," analysts at UBS said in a note.
"Furthermore we believe the market could now allocate a higher probability for further orders from new/existing customers going forward," UBS analysts added.
Engineering firm GKN (>> GKN) was another top gainer, jumping around 3 percent following an upgrade from Exane BNP Paribas to "neutral" from "underperform", with the broker citing benefits from possible future disposals.
Defensive shares including tobacco companies Imperial Brands (>> Imperial Brands) and British American Tobacco (>> British American Tobacco) and precious metals miner Randgold Resources (>> Randgold Resources) brought up the rear on the FTSE.
Among mid-caps a jump in esure's (>> Esure Group PLC) shares helped the index <.FTMC> gain 0.3 percent.
Shares in esure soared 6.1 percent following a media report that the insurer's biggest shareholder Peter Wood was looking to sell his 30.8 percent stake.
Shares in Provident Financial (>> Provident Financial) fell 5.5 percent, taking their year-to-date losses to 74 percent, fresh from the company's demotion to the mid-cap index.
A trader said its slide could be related to the index change and souring investor sentiment after RBC downgraded the stock last week.
(Reporting by Kit Rees and Helen Reid; Editing by Andrew Roche)
By Kit Rees and Helen Reid
Stocks treated in this article : GKN
, British American Tobacco
, Standard Chartered
, BAE Systems
, Provident Financial
, Randgold Resources
, Imperial Brands
, Esure Group PLC
, HSBC Holdings