The group, Scotland’s biggest whisky distiller, was reported to be in the sights of Brazilian investment firm 3G Capital, helping shares rise by 6.8 per cent, or 119.5p, to close at 1,880p.
Brokers at Jefferies said a purchase of Diageo “would be comfortably the biggest ever and well beyond anything 3G have previously contemplated”, adding that a move for the group by Anheuser-Busch InBev, supported by 3G “feels more plausible”.
“Either way, this feels like a prompt for a re-evaluation,” they said.
But the wider FTSE 100 index was down 14.56 points to 6,790.04, as the market struggled for direction throughout the session trading narrowly between positive and negative territory. The fall comes on top of a drop of nearly 200 points last week - its worst week since December.
There was little to ease fears over the Greece crisis over the weekend as a war of words flew between the Greek government and the European Union over deadlocked talks on releasing much-needed bail-out cash for the country.
Sentiment was also dampened by the latest trade figures from China, which showed exports and imports both shrinking in the latest sign of stuttering growth in the world’s second biggest economy.
London-listed commodities stocks fell, with Glencore down 2.6p at 274.8p, Anglo American off 10p at 1,005.5p and BHP Billiton falling 19p to 1,308p.
Meanwhile, supermarkets were under pressure after the latest round of price cuts announced by Morrisons - the first ordered by new chief executive David Potts - with savings promised on 200 “everyday items” such as bread, milk and butter. Shares fell 0.8p to 172.8p.