Analysts expect Tuesday's Budget to be broadly neutral but to maintain the tight grip on spending. It is likely to make few changes in spending and taxation and will focus on measures to boost employment. However, a report on average earnings growth, due on Wednesday, is expected to show that wage inflation - a major concern for the Bank of England - accelerated in January, raising fears that rates will rise again soon, which could prompt a sell-off in gilts.
Other reports due in the week include retail price inflation and government borrowing on Tuesday, retail sales and the labour market report on Wednesday, and M4 money supply growth and M4 lending on Thursday.
Interest rate concerns may still be outweighed by continued expectations of mergers or bids among some large companies, which will boost equities.
"Something will happen, and investors are wary of being under-invested in a sector which may well see activity," said Robert Buckland, equity strategist at HSBC James Capel.
The FT-SE 100 was little changed last week, slipping 0.6 points, or 0.01 per cent, to 5782.3 as gains by telecoms stocks were offset by lagging oil stocks. "We've got to be looking at 6,000 as the important psychological level, as long as the Budget allows," said Mr Parrot.
Oil stocks fell as the chance of a military strike against Iraq diminished. Crude oil traded in London slid to a nine-year low of $12.70 a barrel on Thursday.
The FT-SE Telecommunications index led gains, rising 5.73 per cent. Shares benefited from the high price paid by WorldCom for NFS Communications.
Investors will closely watch earnings reports from major exporters for evidence of the strong pound-cutting profits. Engineering companies Smiths Industries, Charter and Cobham all report 1997 figures this week.
"If the pound remains at current levels, the damage to the engineering industry will not be confined to the short term," the Engineering Employers' Federation said in a pre-Budget report.
Among the largest companies reporting earnings are Kingfisher, insurer Sun Life & Provincial Holdings, media company Pearson and Diageo, the foods to liquor giant.
Gilts fell at the end of last week as US debt slipped and the UK reported that the economy grew faster than expected in the fourth quarter. The benchmark 7.25 per cent 10-year UK government bond fell 6/32 to 109 12/32. The yield rose 2 basis points to 5.96 per cent.
"The quarterly figure has been revised from below-trend to above-trend growth, making a rate rise more likely," said Glenn Davies, chief economist at Credit Lyonnais Securities.Reuse content