Financial markets ended the week on a high note on both sides of the Atlantic after better US jobs news and renewed faith in the European Central Bank sent shares, bonds and oil prices surging.

Shares in London closed at their highest level in three months after upbeat news from the American labour market gave fresh legs to a rally in Europe. Markets made a rapid reappraisal of the plan to end Europe's long-running sovereign debt crisis outlined by Mario Draghi, the bank's president on Thursday, after initially giving the proposals a cool reception.

Stock markets in Madrid and Rome rose by 6% and interest rates on long-term Spanish and Italian borrowing fell sharply as investors took fright at the prospect of unlimited bond buying by the ECB in Frankfurt. Analysts said the promise of action if countries were prepared to sign up for tough deficit-reduction programmes was a sign that Europe was at last getting to grips with its problems.

Holger Schmieding, economist at German bank Berenberg, said: "On 2 August, the ECB finally stepped up to the plate meaningfully. It announced that it would do all it takes to repair the transmission mechanism of its monetary policy. At the moment, turmoil in sovereign bond markets is preventing the ECB's monetary policy from working.

"Central bank interventions work if they impress markets. If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets. In that case, the ECB may not have to buy many bonds."

Mariano Rajoy, Spain's prime minister, said he would want to see more details of the help on offer before he would ask for outside financial assistance, but markets were cheered by reports from Germany that Angela Merkel's governmentwould not stand in the way of Draghi's bond buying proposals.

Interest rates (the bond yield) on 10-year Spanish borrowing fell by 0.29 percentage points to just below 7%, with a similar sized fall in Italy taking its 10-year bond yields down to just above 6%. Interest rates on two-year Spanish borrowing fell even more sharply, by 0.8 percentage points to 3.72%, after the ECB said it would concentrate its efforts on bonds of short duration.

Despite the market bounce, the economic news from Europe remained grim, with consumer confidence in Spain falling below its previous all-time low, reached when the global financial crisis was at its most acute in 2008. Of those polled, 90% said the economic situation has worsened in the past six months and 60% believe things are going to get worse.

In the UK, where the FTSE 100 closed 125 points higher at 5787.28, the monthly look at the service sector from CIPS/Markit showed activity growing at its slowest pace since late 2010. The Purchasing Managers Index slipped from 51.3 to 51.0 in July, barely above the cut-off point that separates an expanding from a contracting sector.

Shares on Wall Street also rose in early trading, with the Dow Jones Industrial Average breaching the 13,000 level after a jump of more than 200 points. This followed the release of official figures showing the US added 163,000 new jobs in July. The increase in non-farm payrolls was ahead of economists' expectations and offered some relief for President Barack Obama in US presidential election year.

Private companies added 172,000 jobs last month, while government shed 9,000 positions. The US added just 64,000 jobs in June. While the number was far better than expected it was not enough to bring down the unemployment rate, which edged up to 8.3%. That number is derived from a separate survey, and economists said it tends to be volatile but the rise was immediately seized upon by Obama's opponents. The Republican presidential candidate Mitt Romney called the figures "a hammer blow to struggling middle-class families".

The US labour department said that since January, employment growth had averaged 151,000 per month, about the same as the average monthly gain of 153,000 in 2011. The labour market has slowed sharply after strong gains of over 200,000 a month in the winter, spelling possible trouble for Obama before the election on 6 November.