Update: The pound has surged, sending the FTSE 100 into the red, after the UK and European Union agreed to the terms of a Brexit transition deal.
Sterling jumped 0.7% against the dollar to $1.404 on the news, with the euro dropping 0.4% to trade at 87.8p.
That weighed on the FTSE 100, which closed 121 points, or 1.7%, lower at 7,043. A stronger pound tends to hamper the UK blue-chip index, as its stocks rely on overseas markets for around three-quarters of their earnings.
Under the terms of the transition agreement, the UK will be bound by single market rules but will not participate in EU decision making. EU nationals arriving in the UK during the transition will get the same rights as currently.
The EU and UK have also agreed to Northern Ireland effectively remaining in the customs union, preventing a hard Irish border 'unless and until another solution is found'.
Bill McQuaker, multi-asset fund manager at Fidelity International, said the news could lift some of the clouds hanging over UK stocks.
'Most fund managers are underweight the UK on the back of Brexit-related risks,' he said.
'Those risks have not gone away - a bad deal would still be negative for the economy - but with the status quo now is place for at least another three years, and with the UK traditionally a defensive market, UK equities might begin to look more attractive again.'
On the FTSE 100, Micro Focus (MCRO) was the heaviest faller, down 46.4% at £10.11 as the software company lost its chief executive and cuts its revenue outlook.
Real estate investment trusts also made gains, buoyed by French property group Klepierre's (LOIM.PA) rejected £4.9 billion bid for Hammerson (HMSO).
House builders also made gains, after Rightmove house price data showed the biggest monthly jump since 2004.
Hammerson surged to the top of the FTSE 250, up 24.1% at 542.4p, after rejecting the Klepierre approach, which valued the company at 615p per share.
'The approach by Klepierre is unsolicited and entirely opportunistic in its timing,' the company said in a statement.
Peel Hunt analyst Matthew Saperia said the offer was likely to scupper Hammerson's planned merger with Intu Properties (INTUP), whose shares jumped 3.2% to 210.5p.
'Despite the board rejection, Hammerson is now in play and the likelihood of its proposed merger with Intu properties proceeding has decreased considerably,' he said.
'This is likely to be reflected in the relative performance of both share prices.'
Bookmakers also made gains on the mid-cap index after the Gambling Commission recommended a £30 maximum stake on some controversial fixed odds betting terminals, a higher cap than feared.
The government had said it was looking at a cap of between £2 and £50. While the Gambling Commission has recommended a £2 cap from slot games, its is planning relaxing that limit to £30 for non-slot games such as roulette.
'While certainly not the outcome the bookmakers would have originally hoped for, this is better than what had been feared following January’s news sharp cuts in stake limits was on the cards,' said George Salmon, equity analyst at Hargreaves Lansdown.
'Gambling machines are big money-spinners for the bookies. William Hill for example takes £9.5 million a week in gross winnings from machines. The new limits will likely see this fall in the future, but a higher cap on roulette-based games could help protect some of the huge revenues these machines make.'
On the Alternative Investment Market, shares in Accrol (ACRL) lost two-thirds of their value as the troubled toilet paper maker warned on cost issues.
That will be a blow to fund manager backer Andrew Hunt, who holds 2.8% of his £43.3 million Standard Life Investments UK Equity Recovery fund in the stock.