Market Report: BP break-up mulled as FTSE 100 rally ends at last

As the blue-chip index's rally finally came to a halt, the future of BP was back under discussion in the City. There have been an increasing number of people calling for a demerger of the oil giant as a way to revive its depressed share price, but yesterday analysts from Royal Bank of Scotland decided to swim against the tide.

Hopes that the group, which remains over a third lower than before last year's Gulf of Mexico disaster, could split its upstream and downstream operations have been buoyed by the fact that a number of its peers have recently embraced the idea, including the US company ConocoPhillips.

However, RBS said large oil companies demerging "goes against industrial logic", adding that "even in cases of pronounced undervaluation... [it is] a risky method of financial engineering".

Instead, scribblers from the broker said BP – which edged up 0.7p to 405.85p – should concentrate on further disposals, pointing out that it has already gained more than $1bn from asset sales since the oil spill. While they estimated the group had a break-up valuation of 941p a share, they argued that this "highlights the merit of the group's ongoing disposal programme" rather than supporting the prospect of a demerger.

Overall, a late rally failed to stop the FTSE 100 finishing in the red for the first time in a week, ending a run in which it had advanced more than 9 per cent. By the bell the blue-chip index was a mere 3.3 points worse off at 5,395.7, with trading desks cautious ahead of last night's vote in Slovakia on the eurozone bailout fund.

Investors were also being unsettled by the analysts at Moody's Analytics who warned there was still a risk the United States could suffer a further downturn. It certainly did not improve sentiment around Wolseley, given that two-fifths of the building supplies company's revenues come from across the Atlantic, and it moved back 19p to 1,722p.

BAE Systems shot up 10.7p to 281.1p to take pole position after vague chatter suggesting that a break-up bid for the defence giant could be in the pipeline emerged once again. City voices also highlighted the award earlier in the week of a contract to supply helmet technology parts for the F-35 fighter jet, as well as positive developments over a project to replace thousands of Humvees for the US Army and Marine Corps, as signs that budget cuts in the country will not be as bad as feared.

There was little other takeover gossip for traders to get excited about, although there were reheated mutterings from the States that the troubled camera maker Eastman Kodak may be attracting interest from private equity.

Meanwhile, the French broker Société Générale argued that there would be a rush of corporate activity in the near future, claiming that "European companies need to make acquisitions" to "counterbalance weak economic prospects in [the region]". It drew up a list of 40 names it believed could become targets, including Shire (up 8p to 2,022p) and Meggitt (up 5.7p to 356.9p).

The recovery of Mothercare – which shed over 40 per cent in one session after its profit warning last week – gathered pace as the troubled baby products retailer announced that its chief executive, Ben Gordon, would leave after next month's interim results. In response, it pushed up 9.19 per cent to 210.2p on the FTSE 250, with Guardian Stockbrokers' Atif Latif saying the change "allows a shift of strategy that should appease investors".

It was a strong session for the sector in general, thanks to sales figures from the British Retail Consortium showing that last month had not been as bad as feared, and Argos owner Home Retail jumped up 5p to 131.5p while Sports Direct was 4.2p better off at 218.9p.

Debenhams was also ahead, shifting 0.95p higher to 65.25p, with Morgan Stanley raising its rating for the department store to "overweight". Geoff Ruddell, an analyst at the broker, said the group was likely to introduce a share buyback programme "surprisingly soon", claiming its excess free cash flow was high enough to "retire around 10 per cent of its share capital each year".

Multi-tasking Rentokil Initial was still rising, easing ahead 0.45p to 69.65p, in the wake of bid speculation returning on Monday. However, Petrofac – also the subject of takeover whispers earlier in the week – slipped 18p to 1,280p after its chief executive played down the rumours.

Fusion IP rocketed up 17.54 per cent to 33.5p on the Alternative Investment Market as the university research group revealed a £1m profit for the year – its first-ever pre-tax profit.

Also spurting up was Rockhopper, despite the Falkland Islands explorer admitting it had drilled a dry well. Nonetheless, it still closed 12.67 per cent higher at 191.25p after increasing its estimates for its Sea Lion prospect.