The blue-chip FTSE 100 index <.FTSE> closed up 1.1 percent at 6,911.40 points, edging nearer to its 2016 peak of 6,955 points reached in August, its highest level in more than a year.

The U.S. Fed left interest rates unchanged and projected a less aggressive path for hikes next year and in 2018 .

However, it signalled it still might tighten monetary policy by the end of this year as the labour market improved. Fed Chair Janet Yellen said U.S. growth looked stronger and rate increases would be needed to keep the economy from overheating and fuelling high inflation.

Nevertheless, while rates may go up in the United States, interest rates remain at record lows in Britain and the euro zone, hitting returns on bonds and cash and driving investors to seek better returns on the stock market.

"It is becoming clear that central banks around the world see themselves supporting the economy with loose monetary policy while governments remain slow with fiscal reform," said Lorne Baring, managing director at B Capital Wealth Management.

The FTSE 350 industrial metals and mining index <.FTNMX1750> was the day's strongest sector closing up 4.6 percent.

Mining shares were the top-performing FTSE stocks, led by Glencore which finished up 5.5 percent as the Fed's decision pushed down the U.S dollar, making commodities cheaper for holders of other currencies.

"On the back of the Fed’s inaction last night, the markets have taken quite some respite from that," Dafydd Davies, partner at Charles Hanover Investments said, noting mining stocks were pushed "to the forefront of the FTSE 100."

The FTSE 100 is up around 10 percent so far in 2016, after a Bank of England rate cut helped the FTSE to recover from June's vote to quit the European Union.

(Editing by Larry King/Ruth Pitchford)

By Adela Suliman and Sudip Kar-Gupta