The lurch higher in volumes on AIM, a sub-market of the London Stock Exchange, followed implementation on Monday of a government plan to let people invest in small firms while avoiding tax to help drive economic recovery.

The UK's move to allow individual savings accounts (ISAs) - popular products allowing limited tax-free saving - to hold AIM stocks has seen volumes over the past four days rise to some 35 percent above the average since the beginning of June.

Despite the seasonal quiet period, trading volumes are up 11 percent on the year-to-date average and analysts expect them to rise further.

"It went absolutely mental on Monday and it's still pretty strong," Mike McCudden, head of derivatives at Interactive Investor, said, adding that on the first day of trading under the new rules his clients made 300 percent more trades in AIM compared with the prior four Mondays' average.

"We expect volumes to taper off from initial highs as clients reach their ISA limits and the initial excitement settles down, however, going forwards we expect steady fresh inflows of investment into this market."

Many AIM stocks are small, risky early-stage resources companies, which often need repeated capital injections. This weighting saw the AIM index significantly underperform the blue-chip FTSE 100 <.FTSE> over the past two years.

Such firms do, however, have the potential for big gains, for example if they find metal or strike oil and with investor appetite for them revived by signs of economic improvement.

The FTSE AIM index <.FTAI> has this week risen about 1.8 percent, outperforming the blue-chip FTSE 100 <.FTSE>, around 1.5 percent lower.

Ncondezi Coal (>> Ncondezi Energy), Maple Energy (>> Maple Energy plc) and hazardous waste specialist Augean (>> Augean plc) are among stocks that have seen average daily volumes double compared to the past month.

McCudden at Interactive Investor said his clients had bought heavily into potash explorer Sirius Minerals (>> Sirius Minerals PLC), seeing good value in the shares which recently fell sharply on concerns over the outlook for the potash market.

Oil explorer Gulf Keystone Petroleum (>> Gulf Keystone Petroleum Limited), which is focused on oil fields in the Kurdistan region of Iraq, has also proved popular, he said.

The pair were among the AIM shares most purchased this week by clients of Hargreaves Lansdown, whose data runs to Thursday's close. Others on the list included Berkeley Mineral Resources (>> Berkeley Mineral Resources plc) and oil and gas group Bowleven (>> BowLeven PLC).

STRONG INTEREST

Although traders reckon prices will fall back from recent peaks, they anticipate strong interest in the junior market, particularly in light of a complementary UK decision to abolish stamp duty on shares traded on AIM from next year.

But brokers cautioned that success will often come by way of very careful stock selection. Killik & Co suggested focusing on companies which offer yield, such as audio visual equipment rental business Avesco (>> Avesco Group Plc).

And Jim Dolan, head of retail at Beaufort Securities, said AIM investment would remain risky.

"These are very often young embryonic start-up companies that are looking to raise funding to move on to the next stage of their development or companies that have gone through a tough time, are down on their luck, and are looking to get themselves going again... It's safe to say there is a high risk attached."

(Editing by Nigel Stephenson)

By Tricia Wright