London's front-line stocks staged a strong rebound yesterday after suffering three straight sessions of heavy falls as more hard takeover activity reminded investors of the potential for much more bid/merger news in coming months.

And London was much more sanguine about the chances of a rate rise in the US. There was no news of the Federal Reserve open market committee's decision on interest rates as London closed, but the overall feeling was that rates would probably be left on hold for the time being.

There remained some concerns, however, that the Federal Reserve would issue some form of warning that rates might have to be pushed higher in coming months if inflationary pressure began to threaten.

While there were no such upside fireworks in the market's second and third-line stocks, they both maintained upward momentum, with the FTSE 250 nudging ahead and threatening its all-time high, and the FTSE SmallCap hitting new intraday and closing peaks.

"London was a bit twitchy at the start but once the bids starting rolling in and the better feel about US rates kicked in, we felt much better," said one marketmaker.

He insisted, however, that the midcaps and smallcaps offered better value than the leaders, citing the widespread rumours of many more bids in the pipeline.

Asked about inflation and public finance data announced during the mid-morning, he said the market had taken the figures in its stride. "There were no real shocks in the numbers - the shock might come later from the US."

At the finish of a busy trading session the FTSE 100 was 51.6 ahead at 5,877.8, having got to within five points of the 5,900 level during the mid-afternoon when the Dow Jones Industrial Average was moving steadily higher. Not long after London closed, the Dow was up about 50 points.

The FTSE 250 index scrambled about for much of the day, opening on a dull note, rallying, slipping back and then pushing ahead again just before the close, eventually settling with a 2.7 gain at 5,795.2, only 2.6 from its record close and 7.9 off its previous intra-day record.

The SmallCap, on the other hand, gave another powerful performance, building quietly on a good opening and finishing at a closing and intra-day peak of 2,760.5, up 9.0.

There was a bout of market indigestion when the April inflation data was released along with news of the public finances during that month. A higher-than-expected headline inflation number of 4.1 per cent, up 1.1 per cent on the month, caused only momentary unease, however, and had been widely predicted - including the effects of the Budget moves on petrol, diesel and mortgage payments.

Much better than forecast public finances showed a debt repayment of £3.4 billion, against a forecast repayment of £0.25 billion, and played a part in restoring confidence to sentiment in the market.