London's FTSE 100 Index opened up more than 1% as investors reacted to moves from US policymakers to help shore up two huge mortgage providers.
The Federal Reserve has agreed to provide "as much as credit "as necessary" to Fannie Mae and Freddie Mac, which together manage around half of the US's mortgage market.
Fears over the future of the companies saw their share prices plunge at the end of last week, sending shockwaves through global stock markets.
London's Footsie slumped nearly 3% on Friday alone to take it well into bear market territory - defined by a fall of 20% or more from its peak in June last year. Today the blue chip index opened 69.1 points up at 5330.7.
The Fed said it granted the Federal Reserve Bank of New York authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary". They would pay 2.25% for any borrowed funds - the same interest rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets".
US treasury secretary Henry Paulson said: "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies.
"Their support for the housing market is particularly important as we work through the current housing correction."
Takeover talk in the banking sector also helped power London's shares.
FTSE 250 high street firm Alliance & Leicester said it was in "advanced talks" about a possible takeover of the company, sending the group's shares soaring more than 40%. Stock in rival lender Bradford & Bingley also jumped more than 25%, while FTSE 100 banking giant Barclays was 5% ahead.
The FTSE 100 Index closed down 145 points - or 2.7% - at 5261.6 on Friday, its lowest point since October 2005. New York's Dow Jones Industrial Average fell more than 1%.
Fannie Mae and Freddie Mac either hold or back 5.3 trillion US dollars (£2.7 trillion) of mortgage debt.
Shares in Fannie Mae plunged 45% last week and are down 74% since the beginning of the year. Freddie Mac shares fell 47% last week, and have fallen 77% so far this year.
There were fears that the US Government might have to bail out the firms because of the huge losses they have suffered in the US property crash.
A failure of either firm could be serious for the US financial system as the country's mortgage lending would be severely affected.
Fannie was created by the government in 1938 to offer more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later.
Oil prices rising to new records above 147 US dollars a barrel last week also spooked investors.
Today, London's Brent crude settled back to the 144 US dollar mark on global commodity markets, still a rise of nearly 50% this year alone.