Britain's FTSE 100 index closed lower on Tuesday for the fourth straight session, hit by a sharp fall on Wall Street as oil prices stalked higher and by higher-than-expected UK inflation data.
Telecoms company Cable & Wireless fell 4.1 percent on news it is to pay up to 674 million pounds ($1.2 billion) for smaller rival Energis as it steps up its challenge to market leader BT.
Analysts said the deal should give C&W scale in Britain, but dealers said the shares turned lower after an early rise due to smaller-than-expected synergies from the deal and the suspension of share buybacks in the short term.
Mobile telecoms firm O2 lost 2.6 percent after Dutch telecoms group KPN and Deutsche Telekom said they had ended talks about buying the company and had no plans to bid for it, confirming a weekend report and dashing hopes for a 14-billion-pound take-over.
The main index closed 21.9 points down at 5,322.3, a move that Robert Parkes, UK equity strategist at HSBC, described as healthy consolidation after recent peaks.
"We've moved quite a long way in a short space of time, up 10 percent in the last three months, so it's not surprising that the market's consolidating," said Parkes.
"But we believe the rally is being driven by fundamental factors, and these current levels are sustainable," he added.
News that UK consumer prices rose at their fastest annual rate in at least eight years in July unnerved investors, who reckoned that the Bank of England would be unlikely to rush to cut domestic rates while inflation was warming up.
The consumer price index rose 0.1 percent on the month, taking the annual rate up to 2.3 percent, above the Bank of England's 2 percent target.
"The market was already starting to think we might not have too many cuts coming through; the MPC isn't going to cut too aggressively. Data such as the CPI release are confirming the market view that rates aren't coming down aggressively," said Parkes.
Miners were weak, with Xstrata falling 3.7 percent as investors trimmed Monday's 6.2 percent gain, which was sparked by its purchase of a stake in a Canadian company.
"There was a bit of euphoria around yesterday on the back of the deal with Falconbridge, people were excited that it's very much earnings-enhancing. It was up over 6 percent yesterday, so it's just a bit of profit-taking," said a trader.
"The miners have had a very, very good run, and people are looking for excuses to make sales. There's no real trigger."
Insurance firm Royal & Sun Alliance headed the gainers' list with a 4 percent rise, buoyed by a positive research note from Goldman Sachs citing a benign claims environment and management restructuring of the UK pension fund. One analyst said a revival of vague bid talk had also boosted the shares.
Media stocks featured in the list of FTSE gainers, encouraged by take-over activity in the sector after a report of the possible sale of Wall Street Journal publisher Dow Jones & Co.
Reuters shares added 0.8 percent as J.P. Morgan reiterated its "overweight" stance on the stock, and dealers said financial firm Man Group was also upbeat on the shares. Daily Mail added 2.4 percent as Deutsche Bank upgraded the stock to "buy" from "hold".
But fund manager Schroders dipped 2.2 percent, despite announcing a sharp rise in profits, as dealers said the shares had risen strongly on expectations of good results and that the figure for funds under management came in as expected.
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