Financials lead the way as FTSE starts the week in positive mood

The FTSE 100 index closed 58.8 points higher at 6,189.4 with the market still waiting for an update from Barclays amid strong rumours that the company was in talks on an 80 billion merger with Dutch bank ABN Amro.

Meanwhile, Lloyds TSB was reported to be selling its share registration and stock management business, thought to be worth around 600 million.

Shares in Lloyds TSB were up more than 2 per cent, or 14p, at 548p but Barclays shares dipped 5.5p to 677p by the close, with analysts unsure about the value of a potential tie-up.

Financial stocks in general gained from hopes of consolidation in the sector. Standard Chartered was ahead 33p at 1,428p, Man Group was up 11.25p at 537p and Bradford & Bingley was 11p higher at 450.75p. But insurers topped the risers board with more rumours of stake-building by an activist hedge fund and a potential break-up circling Prudential, which was ahead 26.5p at 708p. Investors also favoured Friends Provident ahead of the company's full-year results, due out today, lifting its shares 8p, or 4 per cent, to 202p. Royal & Sun Alliance also progressed 5.25p to close at 165p.

Robert Parkes, a UK equity strategist at HSBC, said: "This is related to possible M&A activity and that's helped with the rerating of financial stocks throughout Europe."

He added: "We've argued all along throughout the sell-off that it was nothing more meaningful than a short-term correction and we think the market is moving higher from here."

Plumbing and heating supplier Wolseley was also on the front foot with shares up more than 3 per cent to 1,243p after its interim results came in above analysts' expectations, despite posting a 17.6 per cent drop in pre-tax profits due to the slowing US housing market.

The loss was not as great as analysts feared and an optimistic outlook statement boosted the stock by 44p.

Despite a positive note from Merrill Lynch, Imperial Tobacco was the biggest Footsie faller following the weekend announcement that European rival Altadis had rejected its initial approach. The shares closed down 45p at 2,285p.

Consumer products manufacturer Unilever also lost some of its previous gains from Friday as bid rumours subsided and the shares finished 18p down at 1,507p.

Supermarket chain Morrison also saw shares drop after a broker downgrade from ABN Amro due to the costs of the company's strategic review, with shares down 3.75p at 314.75p.

Drugs giant AstraZeneca suffered after its ARISE treatment, created in collaboration with AtheroGenics, failed a significant drug test. The stock was down 20p to 2,861p.

In the second tier, tour operator First Choice announced details of its merger with German rival, Thomson Holidays parent TUI, sending First Choice shares soaring nearly 9 per cent, or 24p, to 308p.

But electronics and security firm Laird saw its shares rocket almost 11 per cent as the company said it would return 100m to shareholders as part of plans to sell its home security division for 242.5m. Laird closed 50.25p higher at 513p.

Charles Deptford, manager of the Baring Equity Income and UK Growth funds, said: "Compared with most other asset classes, UK equities offer good value - even more so now."