Tobacco stocks puffed up as news filters out of bid for Gallaher

Shares in Gallaher rose by almost 22 per cent after it confirmed it was the subject of bid interest, while Imperial Tobacco lifted some 10 per cent.

With the Bank of England holding interest rates at 5 per cent - as widely-expected by analysts - the benchmark FTSE 100 recorded its fourth consecutive session of gains to close up 41.2 points, or 0.7 per cent, at 6,131.5.

Meanwhile, the FTSE Mid-250 marker ended the session 31.1 points higher at 10,891.3.

Paul Webb, a trader at CMC Markets, said: "After a dubious start, it's been a solid run of gains for the London index, breaking back above the 6,100 level, fuelled largely as a result of merger and acquisition speculation in the tobacco sector and a degree of relief that the Bank of England did indeed leave interest rates unchanged at this week's meeting."

Peter Dixon, UK economist at Commerzbank, added: "The market is drifting up and any positive company news gets factored in, but in any case trade volumes from next week will probably tail off until Christmas."

Gallaher, which makes Benson & Hedges and Silk Cut, was up 211p to 1,190p as reports linked the approach from Japan Tobacco, the world's third biggest tobacco company and a former state-owned monopoly.

The interest surrounding Gallaher shares spread to rival firms Imperial Tobacco and British American Tobacco as investors eyed the prospect of further consolidation in the sector. Imperial gained 192p to 2,079p and BAT was up 32p at 1,455p.

The cigarette firms were joined on the Footsie leaderboard by Barclays - up 20.5p to 707p - as traders speculated that it could be a target for BBVA or Bank of America.

That appeared to give rival banks a boost and Royal Bank of Scotland lifted 38p to 1,954p, HBOS closed 13p higher at 1,061p, and Lloyds TSB edged up 7p to 550.5p.

However, Bradford & Bingley dipped 3.25p to 474.75p after a decline in margins overshadowed forecasts that full-year profits would meet expectations.

Prudential rose 4.3 per cent, helped by a Cazenove upgrade.

Severn Trent was on the slide after it suffered a knock to half-year profits as it counted the cost of tackling leaking pipes and refunding inflated bills. The shares edged down 29p to 1,450p.

In the second tier, North Sea explorer Premier Oil fell more than 10 per cent, or 141p, to 1,205p after it said it had ended takeover talks with an unnamed suitor, said to be Dubai Energy. Meanwhile, leisure group Rank floundered after announcing the 490 million sale of its Hard Rock Cafe chain to a Native American tribe. Shares slipped 4 per cent to 255.5p amid disappointment over the sale price, which was coupled with a downbeat trading statement.

But going in the other direction was under-pressure high street stalwart Woolworths, which gained 15 per cent to 37.5p as investors bought back into the stock following its recent profits warning. Woolies is seen as a possible takeover target for Icelandic group Baugur.

First Choice Holidays was up more than 5 per cent after it emerged from a difficult year to report a rise in profits.

Most miners fell on lower base metals prices. Vedanta Resources slipped 0.8 per cent, while Anglo American fell 1.4 per cent and Xstrata dropped 1.1 per cent.