A MID-morning burst of takeover/merger speculation in the banks and insurance sectors, plus a sparkling showing by the utilities fuelled a spectacular eve-of-Budget performance by British shares.
Adding spice to a resurgence of confidence in equities was a late story that the first Budget under the new Labour government might not, after all, include the abolition of the tax credit of dividend payments.
Reports that Mr Gordon Brown, the Chancellor, would abolish the tax credit at a stroke were behind the British market's steep decline which extended to 4.3 per cent over six trading sessions in the middle of June.
A surge on Wall Street, after the NAPM survey, added to the general euphoria in the London market.
The recent bid talk surrounding the banks, and National Westminster in particular, reached new peaks of intensity yesterday, driving the shares up almost 5 per cent at one stage and triggering a sequence of backwardations - where bid and offer prices are reversed because of the frantic pace of trading in the stock.
Potential bid/merger partners for Nat West tripped off dealers' tongues, but the favourite to emerge as an eventual partner for the bank remained Abbey National, which was involved in merger talks with NatWest earlier this year.
Takeover rumours also encompassed the insurance arena, with Commercial Union spearheading the sector amid suggestions that BATs may be about to bid for the company.
Banks, insurances and utilities occupied seven of the top 10 places in the FTSE 100 performance table, while utilities featured prominently in the FTSE 250.
Sustained mostly by the powerful performances in those areas but also by an acute squeeze on marketmaker's short positions, the FTSE 100 jumped 123.7. or 2.7 per cent, to 4728.3.
The heavy gains in the leaders did not fully filter through the market's second-liners and smallcap stocks, which were again hurt by the continued strength of sterling.
The Bank of England's sterling index rose to 102.4, before easing to 101.7 at the close.
Big exporters, including many of the top engineering companies, such as Lucas Varity, GKN, TI and Wolseley, were among the underperformers in the FTSE 100, while IMI, McKechnie and Laird Group were among the casualties in the FTSE 250.
But the latter managed a 21.3 improvement to 4452.5, sustained by its utilities components and big rises in Eurotunnel and Amersham, the latter after the surprise merger with Nycomed of Norway.
The FTSE SmallCap index moved in a narrow range, edging up towards the close and finishing the day 0.4 up at 2225.6.
The mid-morning upsurge in share prices was in sharp contrast with a subdued opening in London.
Turnover in equities was a disappointing 792.1 shares at the 6 p.m. reading.
