After falling to its lowest level for more than two years on Monday on fears that other financial institutions may suffer the same fate as Bear Stearns, the FTSE 100 was 2.6 per cent stronger at 5,552.5 just after mid-day.
However, sentiment was helped by a late rally on Wall Street. The Dow Jones Industrial Average ended up 0.2 per cent despite news that Bear Stearns has been sold to JP Morgan Chase for a cut price $2-a-share.
Markets were steadied ahead of the open on Wall Street by better-than-expected headline earnings from Goldman Sachs and Lehman Brothers.
Later, the US central bank is expected to make a further deep cut in the Federal Funds rate - possibly a 1 percentage point cut to 2 per cent - as it attempts to ease the growing sense of financial crisis.
However, fears remain about rising inflation. UK consumer price inflation rose to a nine-month high of 2.5 per cent in February. Although in-line with market expectations, the rise, which was fuelled by increased utility prices, cast doubts on further interest rate cuts from the Bank of England next month.