London's blue chip share index soared through the key 5500 barrier for the first time in 16 months today as investors started the new year in a buoyant mood.

The London market kicked off where it finished 2009 with no end in sight to its recent rally thanks to economic optimism and signs of a return in takeover activity.

The FTSE 100 Index leapt 1.6% to close 87.5 points higher at 5500.3 - a level not seen since before the Lehman Brothers collapse last September.

Stock markets across Europe joined in the new year gains, with France's Cac 40 ahead nearly 2% and the Dax in Germany closing up 1.5%.

A surge on Wall Street spurred on stock rises in late session trading after America's Dow Jones Industrial Average rose nearly 170 points soon after opening.

Reports of stronger manufacturing activity around the world as well as a rise in oil prices helped stocks gain ground.

Markets had already been given a boost by overnight news that China's manufacturing industry expanded in December at the fastest rate in 20 months.

This was followed by a US trade group report confirming that manufacturing activity expanded faster than expected in December, while a similar UK survey leapt to a 25-month high.

Recovery hopes saw oil prices tick above 81 dollars a barrel, which also leant support to commodity-based stocks.

Expectations for a revival in merger and acquisition activity likewise acted as a boost, following a multi-billion dollar move by Basel-based drugs firm Novartis for the Alcon eye care business currently majority-owned by Nestle.

Joshua Raymond, market strategist at City Index, said that while today's gains were good news for markets, they came as no surprise given previous new Year trading patterns.

He said: "European markets have posted gains seven times out of the last eight years for the first trading day of the new year and so today's gains are no surprise, particularly with the way equities finished 2009.

"The key really will be whether this momentum can hold."

The FTSE 100 finished 2009 on a high note after a more than 200 point gain over the festive period, which helped it close the year 22% up on 2008 - the best annual performance since 1997.

Today's hike kept the cheer going, with retailers among those posting gains.

Argos firm Home Retail Group was up 5%, while rival Kingfisher - owner of rival B&Q - was 3% better off.

Marks & Spencer was 3% ahead as analysts expect the first like-for-like sales growth in more than two years on Wednesday when the firm reports Christmas figures.

But part-nationalised Royal Bank of Scotland was the leading riser with a 10% gain thanks to a broker upgrade.