UK stocks closed slightly lower on Tuesday as falls in the banking and telecoms sectors outweighed gains by oil explorer Cairn Energy after an upbeat statement and retailers Kingfisher and DSG International on bid talk.
Support services group Capita also fell 1.3 percent after Morgan Stanley downgraded the stock, saying it looked fully valued and faced increasing competition.
Aside from individual stock moves, analysts said concern about rising interest rates was another reason to hold back from rushing into equities, which are at their highest level in nearly five years in the UK and Europe.
"We all say 'oh yes, equities are the cheapest asset class', but then you look at it, and we all have vertigo and we say we'd all feel a lot easier if we could get through these rising interest rates," said Dan Bunting, European strategist at Dryden Wealth Management.
Central banks in Europe, Japan and the US are all expected to tighten monetary policy, while expectations of an interest rate cut in Britain are waning, prompting concern that hikes around the globe could hit the outlook for corporate profits and economic growth.
The FTSE 100 share index closed down 2.2 points at 5,950.6 - turning lower after earlier hitting a session peak of 5,978.6 points, its highest intraday level since June 2001.
Banks and telecoms put the most pressure on the index, while retailers and miners formed the strongest sectors.
Despite the FTSE's dip, mid-cap stocks held on to their gains, with the FTSE 250 ending up 0.6 percent at a new all-time high of 9,645.5 points. Wall Street also progressed, with the Dow Jones average up 0.4 percent by the London close after a strong profit report from investment bank Goldman Sachs.
The rise among smaller stocks was led by an 11 percent surge for Kesa Electricals, Europe's largest electrical goods retailer, after the group said it had rejected a 1.7 billion pound offer from a private equity consortium.
Hopes of a take-over offer for Kesa spilled over to its former owner, home-improvements group Kingfisher, and the owner of rival Dixons stores, DSG International, which both raced up nearly 6 percent as investors gambled the sector would receive more bids.Kingfisher in particular has been subject to repeated bid speculation in the past, often involving talk of a US suitor.
Takeover fever has been a consistent theme over recent weeks, with London Stock Exchange saying late on Friday it had rejected a bid from Nasdaq, while on Monday property tycoon Robert Tchenguiz said he was considering an offer for pubs group Mitchells & Butlers.
Some stocks that had enjoyed gains inspired by bid talk in recent sessions edged down, however, including insurer Royal & Sun Alliance, telecoms company Cable & Wireless and Anglo-Dutch consumer products group Unilever.
Away from the M&A speculation, oil explorer and producer Cairn Energy led the way among blue chips with a 6.5 percent rise after it increased estimates for the amount of oil in its key exploration zone and said it was considering a partial flotation of its Indian exploration and production operation.
Cheery news also helped lift shares in industrial materials firm Cookson, which rose 7.5 percent after saying it expected analysts' consensus forecasts for current-year earnings to rise following its 2005 results.
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