The exporter-heavy FTSE 100 index rose 3.5%, clocking its third consecutive session of gains. Lenders HSBC, Barclays and Standard Chartered provided the biggest boost with gains between 8% and 9.6%.

The mid-cap FTSE 250 index was up 1.2%.

Investors globally eyed a Democratic sweep of the U.S. Senate that could result in a bigger fiscal stimulus.

"Once we get past the U.S. political situation, COVID is going to be increasingly front and centre," said Craig Erlam, senior market analyst at OANDA.

Oil heavyweights BP and Royal Dutch Shell rose almost 6.5% as crude prices gained after Saudi Arabia said it would make additional, voluntary oil output cuts of 1 million barrels per day in February and March. [O/R]

Investors also looked past the near-term effects of the new lockdowns imposed to curb a surge in coronavirus cases to bet on a quicker economic recovery.

"There is huge liquidity being infused by the central bank which will continue to support markets in addition to an extremely positive 2021 growth outlook," said James Gutman, head of investment portfolios at Dolfin Financial.

British stocks began the year on a positive note, boosted by fresh stimulus, and the government's aim to vaccinate around 14 million of the most vulnerable against the COVID-19 virus by mid-February.

The world's largest exhibitions group Informa Plc rose 6.4% even after forecasting a more than 70% plunge in its 2020 profit.

British baker and fast food retailer Greggs closed higher at 7.8% after it said sales decline had slowed, but warned it does not expect profit to return to pre-pandemic levels until 2022.

(Reporting by Shashank Nayar and Shivani Kumaresan in Bengaluru; Editing by Arun Koyyur and Nick Zieminski)

By Shashank Nayar and Shivani Kumaresan