The FTSE 100 closed just 32.1 lower at 5,937.6 even though Wall Street followed up its 200-point overnight fall with a sharp opening tumble.
The blue-chip index had only one company to thank for its resilience in the face of the US weakness; Bank of Scotland, which went 43.5p higher to 750p. The shock bid by the Scottish lender for National Westminster Bank, 308p higher at 1,354p, triggered a wave of buying among financial stock and saved the market day.
Had it not been for the 5 per cent jump in the banking stocks, which account for more than 18 per cent of the FTSE 100, the leading index would have been down a massive 180 points.
However, the rescue operation mounted by the banks did little to ease dealers' nerves over the direction of US and UK interest rates. As one stressed trader put it: "No one seems to trust this market." Many big players are preferring to stay on the sidelines until the US Federal Reserve meeting on 5 October.
The real extent of the market malaise was evident in the almost bank- free undercard. The FTSE 250 plunged 74.5 - 1.2 per cent - to 5,663.8, while the Small Cap dropped 30 to 2,684.8.
Only a handful of non-banking blue chips survived the bloodbath. Electricity group National Power was one, surging 16p to 487.75p on continued talk of an overseas bid for the whole group or for its international operations.
However, the blue chips' day belonged to the banks. There are dozens of possible mergers and takeovers in the sector and nearly every financial stock was excited by bid rumours.
Royal Bank of Scotland, up 127p to 1,276p, Halifax, 31.5p to 723.5p, and Barclays, 81p better at 1,736p, are generally seen as predators. Abbey National, 85p higher at 1,086p, Woolwich, up 12.25p to 328.25p, Alliance & Leicester, 42p higher to 807p, and insurer Norwich Union, up 8p to 459.5p, are some of the mooted preys.
Legal & General was one of the biggest casualties, shedding 11.5p to 180.5p as the prospect of a collapse in the NatWest bid sent the arbitrageurs scrambling for the exit.
Lloyds TSB, 6p lower to 727.5p, was also unwanted amid fears that it might be left behind in the consolidation race. However, fans of the stock said that Lloyds has cash to spend and pointed to rumours of a strike for an insurer or fund manager, possibly in Scotland.
Tech stocks were among the prominent fallers after the Microsoft president said that its US rivals are overvalued. Computer group Misys plunged 31p to 564p, while TV decoder-maker Pace Micro was down 10p to 200p.
Computer minnow Riva bucked the trend and soared 23.5p to 110.5p after receiving an 115p-per-share bid from Anker, a Dutch maker of electronic payment systems.
The smaller indexes were also swept by bid rumours. The building materials group Rugby, an old bid chestnut, jumped 4.75p to 94.75p on rehashed takeover talk.
UK giant RMC, 10p lower to 900p, has been mooted as a predator, although an overseas strike or a management buyout are also possible. Glass-maker Pilkington rose 4.25p to 115p on talk that an MBO or a bid from a foreign rival could be unveiled on Monday. What is certainly coming on Monday is Pilkington's trading statement, which is expected to be very good.
Transport stocks motored ahead on talk of a series of bids. Bus group Arriva put on 11p to 341p on continued whispers of a strike from overseas, possibly from the French conglomerate Vivendi, and hopes of disposals. UK rivals First Group, 14p better at 329p, National Express, 3p better at 985p, and Stagecoach, 0.25p lower to 199.75p, were also rumoured as potential suitors. However, some traders argued that First Group and National Express are more likely to be targeted by a foreign competitor.
Retailer Storehouse bagged a 2.5p rise to 88.5p on whispers of a break- up bid from entrepreneur Philip Green or even rival Debenhams, 13p higher to 330p. The Irish telecom minnow Stentor jumped 5.5p to 41p on talk of a major deal with a larger rival.
SEAQ VOLUME: 1.4BN
SEAQ TRADES: 95,484
SHAREHOLDERS IN the electronics group Forward Technology will have a nervous weekend. Its US rival Crest Ultra has until Monday to table a 28p-per-share offer. If Crest fails to bid, the Forward management will go ahead with a 26p offer to take the company private. So far Crest has been silent and Forward shares, unchanged at 26.25p, have reflected the market's uncertainty over the outcome of the takeover battle.
OIL TIDDLER Atlantic Caspian is attracting some speculative buying amid whispers of a large find. The AIM-listed shares rose 12 per cent, or 0.75p, to 7p yesterday in hefty volume as punters moved in ahead of a rumoured announcement. According to the market talk, Atlantic has found oil in one of its fields in Kazhakistan, near the Caspian Sea. Any good news would boost the share price, which is below the 30p peak of a couple of years ago.