The market's third consecutive yearly gain came despite some last-minute profit taking on Friday, which left the index down on the day as investors sealed in profits by selling stocks across the board. Nearly three quarters of the market traded lower, with thin volume exaggerating the move, leaving the FTSE 100 down 19.5 points at 5,618.8 when it closed at midday.
The final figure marks a 16.7 percent increase for the year, just below the 17.8 percent rise recorded in 1999 when a bull market drove the FTSE to a record high.
Investors said the year would be remembered for the raft of takeover offers for UK companies including telecoms group O2 and ports operator P&O - a trend that looked set to continue over the coming months.
"The market's clearly had a very strong year and mergers and acquisitions have been a key component behind that. One would expect that deal flow will continue into the new year and that will continue to give some decent support to the market," said Ralph Brook-Fox, an investment manager at Britannic Asset Management.
"Companies have got very strong balance sheets by historic standards, the cost of debt remains very low and I'd expect to see them continue to seek to utilise that balance sheet, either through buying back their own shares or by going out and doing deals."
Analysts also said next year's focus was likely to switch from mid-cap stocks, which finished the year by setting a fresh all-time high on the FTSE 250 index, to their larger counterparts.
"The mid-cap area of the market has been pretty strong so I think you might see a change of emphasis away from mid-cap to large-cap in 2006. I think the market should make progress somewhere in the 5-10 percent range," said David Cumming, head of UK Equities at Standard Life Investments.
The UK stock market re-opens on Tuesday after the New Year holiday.
The mining sector, a hot pick throughout the year as strong demand from China helped keep commodity prices high, continued to feature on the last day of trading. Copper miner Antofagasta rose 2.1 percent, while sector peers Kazakhmys and BHP Billiton also bucked the broadly lower trend.
Housebuilder Persimmon, which snapped up smaller rival Westbury in November, ended lower but still managed to hold its spot as the top blue chip performer in 2005 with a gain of 82 percent.
But there was little joy for Kingfisher, the group that owns home improvement chain B&Q, as it dipped to seal its position as the biggest FTSE 100 faller in 2005 with a decline of 23 percent.
Hilton shares dipped 1.4 percent in the session, taking out much of Thursday's gain in late trade after the leisure group confirmed plans to sell its hotels to its US namesake for 3.3 billion pounds, leaving the UK group with its gambling business Ladbrokes.
"Any material upside is dependent, in our view, on someone being willing to pay a substantial premium for a company whose major betting shop business faces an uncertain future, with growth dependent on the more volatile international markets," said Merrill Lynch analyst Ian Rennardson.