The British stock market returned from its holidays yesterday rather like a child devouring an Easter egg. In the morning, investors' showed a ravenous appetite for stocks, driving the FTSE 100 index up to an intra-day high. In the afternoon, indigestion set in.

The spark for the latest surge in prices came from the US, where the two banking mergers announced on Monday prompted another round of speculation in financial stocks. The sector provided Footsie's top seven performers of the day.

There was also some decent news on the economic front. Producer price figures, which showed a 0.2 per cent month-on-month gain in output (factory gate) prices and a 1 per cent drop in input prices, confirmed that manufacturers were facing little inflationary pressure on the raw materials front.

"We continue to expect that growth and inflation this year will both be below consensus expectations and that, as evidence to this effect comes through, then fears of higher base rates will fade," said Mr Michael Saunders, UK economist at Salomon Smith Barney.

"The next base rate move is likely to be down, albeit not until late this year."

Footsie duly forged ahead in the morning and at its best of the day the index was at an intra-day peak of 6,150.5, up 45. Profit-taking then set in, especially as continental markets retreated in the face of a weaker dollar. Just after 3 p.m., Footsie was down 22.3 at 6,083.2.

But Wall Street opened strongly, helped by the banking mergers and some economic data that appeared to lessen the chance that the Federal Reserve would raise interest rates.

The Dow Jones Industrial Average was around 74 points higher at the close of London trading. Helped by the Dow, Footsie managed to hold on to the 6,100 level, closing down 1.4 at 6,104.1. The 250 and SmallCap indices both edged ahead, although neither set a record. The former gained 12.5 to 5,541.8, the latter 2.0 to 2,636.3.

Sterling and gilts were fairly flat, giving the equity market little direction. There were some warning signs for the market. One of the more solid stocks, Associated British Foods, issued a sterling-related second half profits warning along with a fall in its interim results. There was also a profits warning from Drew Scientific, a diagnostic equipment company, and disappointing figures from the electrical engineer Dowding & Mills.

"This is a market that can only afford to look upwards," said Mr Richard Jeffrey, Charterhouse group economist. "It will seize on any good news as a reason to go higher." "It could go on for a lot longer but I doubt whether it is sustainable over six to 12 months."

But the team at Credit Suisse First Boston remained confident. It said: "The low level of long-term rates and the prospect of a peak in short rates provides compensation for the lack of earnings momentum, particularly when set alongside the favourable flow of funds background."

Volume was 807.9 million shares.