Update: The FTSE 100 has bounced back into positive territory, after a brief fall into the red on stronger-than-expected US inflation data.
The UK blue-chip index was trading 45 points, or 0.6%, higher at 7,213, up from a low of 7,151 as the inflation data was released this afternoon.
US markets also showed poise. Futures had pointed to a 1.2% fall, but the losses were limited to 0.3% on the Dow Jones and 0.2% on the broader S&P 500.
The dollar meanwhile fell back after an initial jump, with the pound trading at $1.39, flat on the day.
But bond markets remained shaken, with the yield on 10-year US treasuries jumping to 2.88%.
Year-on-year inflation hit 2.1% in January, ahead of the 1.9% investors had been expecting and in line with December's reading.
Prices rose month-on-month by 0.5%, above the 0.3% expected and up from December's 0.2% figure.
'This is a strong number,' said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.
'There's a risk that this could pour fuel onto the fire of last week's market sell-off.
'That boiled down to real sensitivity to the prospect of higher inflation than markets had anticipated. That nervousness is not going away.'
(11:35) FTSE up ahead of US inflation data
The FTSE 100 has rallied as investors eye crucial US inflation data to be released this afternoon, which could fuel the next big move in markets.
The UK blue-chip index rose 50 points, or 0.7%, to 7,218 after US markets closed marginally higher yesterday, following Monday's big jump.
US inflation figures to be released at 1.30pm will be closely watched for any signs of an acceleration in price rises which could reignite fears over interest rate rises.
It was strong US jobs data featuring a sharp jump in wage growth which proved the ignition for the stock market sell-off that spread across global markets this month, as investors feared the US Federal Reserve would be forced to raise interest rates more quickly.
Today's release is expected to show a fall in US inflation, from 2.1% in December to 1.9% in January. Any higher figure could spark a renewed stock market sell-off. Retail sales figures published alongside the inflation data will also be eyed.
'Given the market's concerns of higher inflation and faster interest rate hikes, a higher than expected consumer prices index or retail sales reading would in fact feed these fears,' said Fiona Cincotta, market analyst at City Index.
In this case there is a chance that we could see another episode of last week; stock markets and bond markets falling, whilst higher yields would boost the dollar.'
Deutsche Bank's Jim Reid said US inflation figures were likely to prove 'the main focal point every month this year' for markets.
'We are torn here at Deutsche Bank as 2018 has long been targeted by us as the year of the inflation comeback, however there are reasons why today's number may not see this materialise yet.'
Reid pointed to last year's strong January reading and a change in how seasonal adjustments are factored in, both of which could depress today's year-on-year figure.
Edward Park, investment director at wealth managers Brooks Macdonald, said today's reading would 'help clarify if US wage data is a blip or whether it is indicative of a higher path of inflation'.
'We believe that inflation will gradually increase over the course of the year. If however inflation begins surprising to the upside and starts to suggest that price increases will overshoot the bank's target, then the outlook for equities and bonds in 2018 will shift materially.
'Until we see evidence of that however we are focusing on the strong corporate earnings result and also the economic data we have seen so far in 2018 which is pointing to a rosier outlook than the current market levels are suggesting.'
Sky jumps on Premier League win
Sky (SKYB) jumped to the top of the FTSE 100, up 3.4% at £10.97, after the broadcaster retained its grip on rights to Premier League football but at a lower cost.
Sky has paid £3.6 billion for four packages representing 128 games per season over the next three years, down from the £4.1 billion it paid in 2015 for 126 games a year.
BT (BT) has paid £885 million for another package comprising 32 games per season over three years, representing a higher per-game cost than the £960 million it paid for 42 matches per season in 2015. Its shares rose 1.3% to 228.7p.
Two more packages are still up for grabs.
'So far Sky is the big winner from the Premier League auction,' said George Salmon, equity analyst at Hargreaves Lansdown.
'Securing more games at a lower cost is a major coup, and with BT seemingly content to play second fiddle on the Premier League, that rivalry looks to have been thwarted.
'There's always the chance the other two packages may spring a surprise, but with reserve prices not yet reached, it's safe to say Amazon, Netflix and other potential new entrants aren't prepared to adopt the aggressive strategy Sky execs must have feared.'
'Mid-cap' shares also rose, up 0.6%, but shares in Galliford Try (GFRD) slumped 17.2% to 817.5p after the house builder announced plans for a £150 million fund raise to cover the cost of a joint venture with collapsed Carillion.