Shares on the FTSE 100 index have risen more than 1%, while sterling has recovered slightly from a 31-year low.
London's blue-chip share index was up 80 points in afternoon trade at 6,544 as the mood among traders brightened.
The pound rose 0.7% against the dollar to go back above $1.30 and was 0.9% higher against the euro at €1.1754.
"Sterling has recovered this morning in tandem with widespread gains across European stock markets," said Chris Saint of Hargreaves Lansdown.
The FTSE 250 of mid-cap UK firms was 1.3% higher, while stocks in Paris, Frankfurt and Madrid recovered some of their losses from Wednesday.
Rate cut
The recovery is "being led by a rebound in the sectors that have been hit the hardest over the past few days", said Michael Hewson of CMC Markets.
Major UK house builders, Taylor Wimpey and Persimmon, were among the big FTSE winners on Thursday morning, before falling back to gains of around 4%. Their shares are still more than 30% lower since the EU referendum result.
Analysts also pointed to strong economic data from the US on Wednesday and expectations that interest rates would remain low in the coming months.
In the UK, financial markets are now pricing in a 78% chance that the Bank of England will cut interest rates next week.
nvestors are betting Bank of England governor Mark Carney and his team will cut interest rates from 0.5% on 14 July
Bank fears
Sterling has fallen 13% from the high of $1.50 seen before the referendum result - when investors bet heavily on a win for Remain - to lows not seen since 1985.
Despite a sharp sell-off after the Brexit vote, the FTSE 100 is up more than 3% since its close on 23 June. However, it is down around 10% in dollar terms as the slump in sterling has reduced the dollar value of the market.
While there were some tentative signs of recovery in riskier assets on Thursday, investors were still on edge over the fallout from the Brexit vote which helped extend a rally in gold prices.
The precious metal is trading near its highest price in more than two years. Gold tends to perform well when investors are worried about the performance of riskier assets like equities.
In other developments:
- Minutes from the European Central Bank's meeting in early June showed it felt the impact from Brexit could be "significant" and have "negative spillovers" for the eurozone.
- Italian bank shares continued to oscillate over concerns the banks do not have enough reserves to handle $389bn (£300bn; €350bn) of bad loans.
Retail
In a busy company announcement session, shares in Marks and Spencer were down 0.9% after it reported a steep fall in sales.
AB Foods, owners of Primark, saw shares rise 9.3% to be the biggest gainer on the FTSE.
The firm said it was sticking to plans to expand its Primark chain across Europe and the US, and was optimistic about continued growth despite uncertainty created by the Brexit vote.
Sports Direct shares rose 2.1% despite bad publicity about the retailer's working conditions prompting a heavy fall in annual profits.
Fed cautious
Late on Wednesday, the latest Federal Reserve minutes were released, showing that prospects of an interest rate hike have diminished.
This soothed investors who had feared that a rise in interest rates may hinder prospects for economic growth.
The US central bank's last meeting in June took place before the UK's EU referendum.
However, policymakers were concerned the vote would heighten global market uncertainty and potentially hurt the US economic outlook.
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