AN element of doubt and nervousness ahead of the Scott report into the farms for Iraq" affair and an early sell-off on Wall Street left London's equity market marginally easier on balance yesterday.

But the modest 2.6 decline in the FTSE 100 index, to a closing 3,745.0, masked a solid performance by most British stocks. Dealers said the market had been underpinned by a growing feeling that further takeover activity was about to be unleashed in London.

Second-line stocks continued to attract widespread buying interest which drove the FTSE Mid-250 index to another new record close, up 1.4 at 4,161.7.

Among a host of bid stories circulating in the City's trading rooms was one that Rentokil was about to bid for BET, the services group; that one of Britain's big property groups was putting together a break-up bid for P&O; and that a rationalisation of Lloyds Abbey Life (LAL) and TSB Life by Lloyds TSB, which has a 62 per cent stake in Lloyds Abbey Life was imminent. Any deal would involve the demerger of Abbey Life and Bowmaker and see Lloyds TSB buy out the minority of LAL.

At least one of the big broking houses was telling its clients that the insurance sectors, and particularly the composites, would be the next area of the market to attract the attention of predators. Dealers said London was due a down day and would probably lose ground today if Wall Street continued lower after its weak opening yesterday. But most traders continued to adopt a positive view of the market in the short to medium term.

A senior market-maker at one of the big European securities houses said he expected Wall Street to extend its astonishing upside performance and for London to move up in tandem. "There will be a big correction at some point but there is still big pent-up demand for stocks here and in New York," he said.

The trading session began with stocks opening in good form and the FTSE 100 up over five points. But a poor opening by gilts, which were pressurised by weak German bunds, began to unsettle equities which never really recaptured their early sparkle.

A raft of economic data saw relatively encouraging numbers on unemployment, average earnings and unit wage costs.

Retail business on Tuesday topped the £2 billion sterling mark.