Market Report: Dealers in grip of takeover feeding frenzy

Therefore, among blue chips, Friends Provident soared 6p to 179.75p as news that the French insurer Axa has raised its stake in the UK group to 15 per cent sparked rumours that it might be tempted to acquire the whole company. Such talk was of no surprise to JP Morgan. At the start of the week the broker predicted that takeover speculation is likely to support Friends Provident stock over the coming months.

The broker said on Wednesday: "We suggest that bid speculation may support Friends Provident shares in the short term. Merger and acquisition activity in the European insurance sector has recently intensified and we believe the investment community may speculate that Friends Provident is a potential target given its size."

O2 jumped 3.75p to 155.25p after Telefonica seemed to backtrack on recent comments by its chairman, Cesar Alierta, which ruled out it making an offer for O2. Last week Mr Alierta said the Spanish telecom company would not bid for O2. This week, at the request of the Takeover Panel, Telefonica said: "Telefonica has not commented on and does not wish to comment on the possibility of acquiring any particular potential target or targets in Europe or elsewhere." Traders now believe that a move on O2 by Telefonica is back on the cards.

Elsewhere, BOC's future as an independent entity was once again a major talking point. Shares in the industrial gases group touched 1,200p on talk that a 1,330p bid from Germany's BASF could be imminent. But as the close of business drew closer, punters seemed to lose their ardour for the story and so BOC dropped back to finish the day just 1p higher at 1,173p. ING Financial Markets suggested that the repeated talk of a merger between Linde and BOC might prompt BASF to act sooner rather than later.

Meanwhile, another strong performance by the resources sector helped the FTSE 100 rise to a fresh four-year high of 5,407.9, up 24.4. Rio Tinto soared 79p to 2,149p, Xstrata put on 49p to 1,424p, BHP Billiton gained 27p to 873.5p and Anglo American added 75p to 1,554p.

The jump in the price of gold to a 17-year high got investors interested in those explorers which are focused on mining the precious metal. Hence, Peter Hambro Mining rose 17p to an all-time high of 780p, Bema Gold gained 4.5p to 154p and Ballarat Goldfields ticked 0.5p better to 11.5p. Golden Prospect, 2p better at 43.5p, was also boosted by bumper results. The group unveiled a very impressive 766 per cent rise in first-half profits to £5.1m.

So why the sudden rise in the gold price? Numis Securities believes it is because investors are worried about inflation. But longer term, the broker suggests the price of gold is likely to be supported by the underlying supply/demand deficit in the market.

In the healthcare arena, Shire Pharmaceutical gave up 10.5p to 685p after UBS downgraded its stance on the stock. Cutting back its rating to "neutral" from "buy", the Swiss broker said it was concerned about the uncertainty surrounding Shire's near-term sales forecasts. Smith & Nephew fell 3p to 493p as Goldman Sachs slashed its recommendation to "in line" from "outperform" after a meeting with the company on Thursday. Goldman has also been forced to cut back its earnings forecasts for S&N as the company comes up against slowing sales at its wound-management division.

In the FTSE 250, Kesa Electricals jumped 10.75p to 277p on hopes the retailer might soon become a target for a private-equity firm. Despite the gloom about the state of the high street in the UK this week, Kesa shares have registered gains on four of the past five days.

Lower down the pecking order, Sanctuary Group gained 1.5p to 11.5p as punters were excited by rumours the company is close to the sale of its music publishing business. Sanctuary could certainly do with a cash injection. The company is known to be up against its banking covenants as it struggles under a £80m debt burden. However, in the past few sessions investors have taken heart that Fidelity International, the fund management giant, has been aggressively adding to its stake in Sanctuary, which at the last count stood at more than 11 per cent.

BTG rose 12p to 210p as its US partner Genzyme unveiled positive clinical data about one of the compounds it is licensing from BTG. ReGen Therapeutics put on 0.03p to 1.30p on hopes that positive news may be on the way from the biotech after its recent fund raising.