European stocks closed in the green as investors digest the dramatic U-turn that has seen UK prime minister Liz Truss and Kwasi Kwarteng scrap the planned 45p top rate income tax cut.
In London, the FTSE 100 (^FTSE) closed 0.2% higher after tumbling 1.1% – its lowest level since March – as the government's move shows little sign of easing market turmoil.
UK chancellor Kwarteng announced the government was ditching plans to cut the planned 45p tax cut after strong opposition from several Tory MPs.
Former transport secretary Grant Shapps joined his former Cabinet minister colleague Michael Gove in a growing rebellion to criticise the plans during a cost of living crisis.
And shadow chancellor Rachel Reeves called for Truss and Kwarteng to reverse "their whole economic, discredited trickle-down strategy" as she said the U-turn had come "too late for the families who will pay higher mortgages and higher prices for years to come".
Monday's move comes after Kwarteng's mini-budget caused chaos in the financial markets last week amid concerns that Britain was increasing borrowing to fund tax cuts for the rich.
"It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country,” he said in a tweet on Monday.
"As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened."
The pound surged around 1% against the dollar in early trading as traders anticipated the move, but sterling has now dipped slightly versus the greenback at $1.12 after the chancellor confirmed the move.
Read more: Pound rallies on 45p tax rate U-turn
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "The pound surged around 1% against the dollar in early trading as traders anticipated the move, but sterling has now dipped slightly versus the greenback at $1.12 after the chancellor confirmed the move.
"The great Truss retreat on tax saw the pound surge briefly in value, jumping above $1.12, up by round 1% in a matter of minutes just after rumours swirled about the move. It’s lost some of its bounce though as the financial markets digest the latest political turmoil to beset the UK.
"The prime minister was hoping to carve out a reputation as the new Iron Lady, instead she will be seen as highly malleable.
"She has been manipulated into this U-turn after senior conservatives yesterday coming out in open revolt at the Treasury’s decision to scrap the 45p tax band for the wealthy while refusing to rule out cuts to welfare for the poorest."
Gilt yields eased following the government's tax reversal. The yield on the 10-year dropped 10 basis points to 3.99%, while the 30-year is down to 3.73%.
Russ Mould, investment director at AJ Bell, said: "Removing one of the key components of this seemingly flawed plan provided some relief, and you saw that in how the pound rallied and 10-year gilt rates briefly fell below 4%.
"The fact that both the pound fell back and gilt rates started to move higher after the news had been digested is the market’s way of saying there are still plenty of problems with the Government’s finances, state of the consumer and business, and economic outlook."
Across the Atlantic, US indices rallied at the open after recording the longest string of quarterly losses since the 2008 financial crash on Friday.
Watch: How Kwasi Kwarteng's 'mini-budget' has had a big impact