Hopes that interest rates would remain unchanged and a strong performance from financial stocks drove London shares higher yesterday.

A surprise 0.2 per cent fall in the annual rate of inflation gave rise to positive sentiment as the FTSE 100 Index climbed 22.8 to 4569.0 by the close.

With inflationary pressures easing, the pound softened against the US dollar to provide exporters with some relief at a time when a number of markets are slowly recovering.

But analysts said shares were likely to remain volatile until the outcome of the next meeting of the Bank of England's monetary policy committee in a fortnight.

Geoff Langham, head of trading at deal4free.com, said: "A healthy degree of scepticism could serve to keep the index not too far from the 4600 level."

The Dow Jones Industrial Average hovered around its opening mark following a sluggish start to trading on Wall Street.

Corporate news in London was dominated by supermarket chain Tesco, which posted another set of record annual results.

Although pre-tax profits rose 17.6 per cent to £1.6bn and the underlying figure was at the upper end of City expectations, the group saw its stock move close to the top of the Footsie fallers board.

It slipped 3p to 256p after making strong gains on Monday as investors anticipated yesterday's results. All of the Footsie's banking stocks were in positive territory, with Barclays rising nearly three per cent, or 13p to 505p, Abbey National 7p stronger at 442p and Royal Bank of Scotland up 32p to 1722p by the close.

Ladbrokes owner Hilton Group topped the risers board, up more than three per cent, or 7p, at 241p, while BAE Systems climbed 5p to 222p after a positive broker note.

Outside the top flight, Cairn Energy shares continued to sparkle after the oil and gas group confirmed a third exploration well in the northern region of Rajasthan had been successful.

Cairn shares, which have doubled in value in the past two months, reached the £10 barrier for the first time during the afternoon, before slipping back to stand 91p higher, a rise of ten per cent, at 981p.

Chip designer Arm Holdings was also in positive territory after posting first quarter results ahead of expectations as conditions in the semiconductor industry continued to recover.

The group saw its stock rise 1p to 125p as it said its commitment to developing new products throughout the recent downturn was being rewarded with higher licensing revenues.

AB Ports was heading in the opposite direction, falling ten per cent, or 47p, to 434p.