The excitement surrounding M&S was compounded by strong speculation that the legendary US investor, Warren Buffett, was about to reveal that he has a 3 per cent stake in the giant of Baker Street. The twin rumours left M&S 16.75p higher at 461p, with over 16 million shares traded.
But it was the prospect of a merger with Tesco that captured the market's attention. The UK's biggest supermarket notched up the second-largest rise in the FTSE 100, putting on up 12.25p to 190p on turnover of nearly 40 million shares.
Dealers were said to be piling into the two stocks, lured by the prospect of another stores mega-merger less than a week after the pounds 18bn proposed tie-up between Asda and Kingfisher. The two companies played it down, but supporters of the M&S-Tesco story argued that a merger between the two would be a perfect way to counter the ambitions of their rivals.
A fusion between M&S and Tesco would produce a formidable high-street powerhouse with sales of over pounds 24bn and a retail offering ranging from baked beans to underwear. Cost savings from staff reduction and enhanced buying power could be over pounds 100m.
Given Tesco's current strength and M&S's recent loss of form, it is likely that the supermarket chain would be in the driving seat, with a bigger slice of top management positions and, possibly, more shares in the combined group. The competition authorities could prove the biggest stumbling block, with the two groups' interests in the food market likely to be carefully scrutinised by the regulators.
The rest of the FTSE 100 had a quiet day in the shadow of the two retailers, settling 8.8 points lower at 6,311.0. A positive opening in New York did little to dispel the worries raised by Tuesday's big fall. Stronger-than- expected average earnings figures, a pointer to higher interest rates, also prompted players to sit on the sidelines.
With the market looking tired, brokers' comments had a field day. BAT, the high-yielding cigarette maker, puffed up 39.5p to 512.5p - the biggest rise among blue chips - after HSBC said "buy" and targeted 548p. Imperial Tobacco followed suit, rising 19p to 595.5p.
BG sparked 21.75p higher to 358.75p as Merrill Lynch advised clients to "accumulate". Offshoot Centrica rose 2.25p to 112.5p as it outlined plans to launch a savings and loans business.
Pearson, publisher of the Financial Times, papered over recent cracks with a 66p rise to 1,281p. Morgan Stanley and Credit Lyonnais gave the stock a big push.
The Warren Buffet speculation did not stop with M&S. Unilever, up 13p to 557.5p, was also in the frame. Another Buffet favourite, Diageo, fizzed 8p higher to 696p after the French champagne group LVMH said it would only sell its pounds 1.4bn stake if the stock rises at least 25 per cent.
Some of the companies savaged in Tuesday's collapse exacted their revenge yesterday. Dixons, the retailer-cum-Internet provider, logged on a 68p rise to 1,298p as Schroders advised to buy after Tuesday's dip. Telecom stocks were back in favour, with Energis up 39p to 1,590p, Colt rising 14p to 1,084p and Cable & Wireless ringing a 4p increase to 775.5p.
The techies' rise came at the expense of the cyclical stocks - the stock market's latest passion. Billiton, the mining group, dug up a 11.25p fall to 187.75p as dealers booked in profits after a week-long rally. BOC, the gas group, looked flat, losing 56.5p to 1,025p on worries that the pound's strength will puncture profits.
British Steel also caught the sterling blues and fell 9.75p to 147.25p. British Airways nosedived 27.25p to 501.5p amid fears that rising oil prices will increase the price of aviation fuel.
Bank of Scotland was 40p overdrawn at 870p after reporting dull results and higher-than-expected bad debts. The interest-rate fear shook the housebuilders; Barratt crumbled 15.5p to 358.5p, Persimmon slid 10p to 249p and Redrow fell 6.5p to 239p.
The undercard was enlivened by takeover rumours and a rebound in computer stocks. The FTSE 250 outperformed its bigger brother, ending 9.8 points higher at 5,763.4, while the small cap finished 12.5 points up at 2,485.5.
Powerscreen, the troubled Northern Irish engineer, rose to 150p amid rumours that a bid north of 200p is near. Inn Business, the pub group, flowed 6.5p higher to a 12-month peak of 77.5p after confirming bid talks with the venture capitalist Alchemy Partners.
The cutting tools maker Brooke Industrial powered 12p ahead to 82p after receiving an 82p-per-share bid from rival Howle. The sausage-skin maker Devro sizzled to a 5p rise at 154p amid continuing speculation of a management buyout or a bid from its former chairman.
Merivale Moore, the property minnow, developed a 7.5p rise to 91.5p on talk of an offer from competitor Warner Estates, but Newcastle United was caught offside, losing 5p to 73.5p after the cable group NTL said it would not make a bid. Premier Oil rose 1.5p to 19p despite a bust-up with some rebel shareholders who want to oust the board.
Computer and Internet stocks bounced back in sympathy with their US peers. Nasdaq-inspired buying pushed Logica up 47.5p to 592.5p. ARM Holdings almost matched this; it soared 56.25p to 705p after splitting its shares into four. Computacenter, up 37.5p to 500p, and FI Group, 15p higher at 302.5p, completed the IT resurrection.
The Internet minnow Dialog surged 4.5p to 124p on vague talk that a media group is keen to buy a near-30 per cent stake.
Fine Arts Developments, the birthday cards maker, sent out an 8p rise to 131.5p; the mail-order group N Brown is believed to be interested.
SEAQ VOLUME: 1.27 billion
SEAQ TRADES: 86,208
GILTS INDEX: 111.56 +0.10