Indications from a member of the US Federal Reserve's Open Market Committee that the central bank was looking more favourably at a reduction in US interest rates produced another encouraging performance from London stocks yesterday.

At the close, and after a late flurry of support, the FTSE 100 had gained 111.4 to 5,214.7, for a two-day rise of 224.4, or 4.4 per cent.

However, sizeable gains in the leaders did not follow through into the rest of the market; second-liners were restrained by continuing worries about more profit warnings and the FTSE 250 index ended a disappointing 8.0 down at 4,564.2. The FTSE SmallCap also suffered, closing 3.4 down at 2,032.6.

Mr William McDonough, deputy chairman of the Federal Reserve's Open Market Committee and president of the Federal Reserve Bank of New York, hinted on Tuesday at a change of heart on interest rates.

And investors were pinning their hopes that Mr Alan Greenspan, chairman of the Fed, would add to the growing mood of optimism in global markets by signalling his agreement with a cut in rates when he addressed the Senate last night.

Wall Street kicked off last night's session in robust fashion, posting a 100-point advance as trading in London drew to a close.

Dealers warned, however, that the Fed chairman made a habit of wrong-footing markets, as he did recently when he said there were then "no endeavours" to orchestrate a round of global interest rates cuts in order to stabilise world markets and economies.

The Fed's Open Market Committee meets next Tuesday to determine interest policy.

Also helping to keep the London market on the upward path was another dose of takeover speculation.