LONDON (Reuters) - The FTSE 100 scaled three-week highs on Thursday, cheered by promises of spending cuts at miner Rio Tinto and by growing hopes of achieving a U.S. budget deal to avoid recession in the world's biggest economy.
The U.S. 'fiscal cliff' of some $600 billion (374 billion pounds) in spending cuts and tax hikes that is otherwise due to come into force in 2013 has overtaken the euro zone crisis as the top concern for investors. U.S. House of Representatives Speaker John Boehner sparked a rally in global risk assets after he voiced optimism on Wednesday that a compromise could be reached.
President Barack Obama added to the positive mood, saying he hoped to get a deal done in the next four weeks.
"The general mood of the market is reasonably positive," said Neil Marsh, strategist at Newedge.
"There is probably going to be a little bit of volatility surrounding the 'will they, won't they', but ultimately they will - they have to ... If they don't come up with a deal, what will happen not just to the U.S. economy but the world economy is unthinkable."
The FTSE 100 closed up 1.2 percent, or 67.02 points, at 5,870.30, hitting levels last seen on November 7 and heading for its sixth straight month of gains.
Steve Asfour, head of sales trading at Fox Davies Capital, said the strong run could continue into end-212, taking the UK benchmark towards the psychologically key 6,000 mark before a fresh push lower in the new year.
From a technical point of view, however, the FTSE 100 is likely to face tough resistance around the 5,930 area, where it has run out of steam three times in as many months.
Miner Rio Tinto, the 10th-biggest stock in the FTSE 100, added 5.1 percent, after setting out clear plans for operational cost cuts and voicing guarded optimism on demand from key market China.
"It isn't just that they talked about cutting capex and operating costs and ... they have come up with some quite big numbers, but they have also emphasised that they are going to have a bit more of a focus on returning cash to shareholders," said Tom Gidley-Kitchin, analyst at Charles Stanley.
"What we are seeing is financial discipline and a supply response from the industry to more uncertain, lower growth in the short-term ... It is just one company, but I think that's why sentiment has improved and a lot of share prices are up."
The FTSE 350 mining sector added 3.1 percent, boosted by Rio but also taking heart from the growing optimism on the U.S. 'fiscal cliff'.
"There is a fog of uncertainty relating to fiscal cliff, euro zone prospects and - although this is less of a worry recently - the maintenance of Chinese growth," said Gidley-Kitchin.
"The mining companies acknowledge that, and so does everyone else. I think the right response in the short term is not to continue to go flat out, and to proceed with a certain amount of caution."