The transformation of London's equity market from the start of the week, when the FTSE 100 index plunged 141 points on Monday and was widely seen as on its knees, to yesterday, when the index raced back through the 6,000 level, was complete.

Further economic evidence on both sides of the Atlantic that inflationary pressures are diminishing effectively removed the threat of interest rate rises in Britain and US in the short term and provided a further upward thrust for both London and Wall Street.

That news, mingled with a fresh burst of takeover/merger speculation drove all the FTSE indices sharply higher, taking the FTSE 100 clear of 6,000, the FTSE AllShare to within 52 points of its closing record, and the FTSE Mid250 and SmallCap indices to record closing and intra-day highs.

Talk around London's dealing desks suggested a merger of two FTSE 100 constituents was on the boil. Although some of the more cynical dealers dismissed the rumours of a big deal in the pipeline as "no more than a typical Friday afternoon before a long weekend story", others said the story played a big part in the market's latest upsurge.

Various areas of the market were being talked about as providing the candidates, but the most common theme was a straightforward banking deal or one involving a bank and insurance group.

Alliance & Leicester, a long-time takeover favourite and scheduled to address its shareholders on Tuesday, topped the FTSE 100 performance table, closely followed by Royal Bank of Scotland, another so-called bid stock.

The telecoms and oil exploration arenas were also put forward as potential merger scenes, while there was persistent talk that bids are imminent in the utilities, where PowerGen and Southern Electric attracted attention.

The FTSE 100 finished the session 82.0 ahead at 6,010.3, extending the rise on the week to 146.4, or 2.5 per cent.

The FTSE Mid-250 raced up 42.2 more to a peak 5,653.0, up 52.7, or 0.9 per cent on the week, while the FTSE SmallCap finished the day 11.0 higher at a record 2,656.0, up 15.35 or 0.6 per cent on the week. The one disappointment for dealers was the low level of activity in the market. At 6 p.m. turnover was 680 million shares.