The mid-cap FTSE 250 rose 1.3% to its highest since late February after Irish Foreign Minister Simon Coveney said he hoped for a deal in the next few days. However, EU officials see uncertainties as significant gaps remain on some main issues.
"Investors may soon be giving more serious thought to the prospect of no deal this year, and then potentially another round of negotiations in 2021 where the UK could be in a weaker bargaining position," said Russ Mould, investment director at AJ Bell.
"This would be a complete turnaround of events given how so many people thought we were on the cusp of striking a deal, thereby ending the year on a more positive note alongside the vaccine news."
The blue-chip FTSE 100 added 0.4%, with miners Rio Tinto, Anglo American and BHP Group boosting.
The index has tracked a recent rally in global equity markets, ending November with its best monthly performance since 1989 as signs of a working COVID-19 vaccine raised hopes of a faster economic rebound next year.
Although the UK approved the Pfizer-BioNTech COVID-19 vaccine on Wednesday, investor sentiment has been subdued on concerns around the near-term damage to the economy with coronavirus-related business restrictions set to stay in place.
Rolls Royce jumped 15.5% after a report said it was considering a possible re-entry into the narrow-body jetliner market.
Paragon Banking Group gained 4.6% as it said pandemic-led disruptions to lending had affected its business.
(Reporting by Shivani Kumaresan and Shreyashi Sanyal in Bengaluru; Editing by Subhranshu Sahu and Shinjini Ganguli)
By Shreyashi Sanyal
