Market Report: City plays cupid by urging merger of Rio and BHP

Even the world's biggest miners may be in need of matchmaking. With both Rio Tinto and BHP Billiton deciding over the last few months to put their diamond businesses in the shop window, some in the Square Mile were suggesting that instead of searching for buyers, the two might gain more of a sparkle by teaming up together.

Saying there are only "a handful" of potential acquirers for the units, Nomura's David Radclyffe argued a better option could be a merger of the operations before listing the subsequent company.

The scribbler – who gave his creation the not very thrilling moniker "Diamond Newco" – said that with a "a solid asset base and lower overall sovereign risk", it would create "an attractive alternative to the listed diamond producers".

He claimed that only De Beers and Russian state-owned miner Alrosa would be larger diamond businesses, and estimated the group's market value could reach as high as $3.5bn (£2.19bn).

BHP was hardly in glittering form following the proposal, with the digger dropping 30.5p to 1,934.5p, although this was its first fall in three sessions. Meanwhile, Rio Tinto – which Mr Radclyffe kept as his favourite of the diversified miners – was somewhat better off, although it still crept down 25.5p to 3,530.5p.

The FTSE 100 was unable to push on after a hard rally on Monday sparked by strong manufacturing data from the US. Disappointing factory orders figures meant economic signals from across the Atlantic were less promising yesterday as the benchmark index was pegged back 36.55 points to 5,838.34.

Morgan Stanley's decision to call Aberdeen Asset Management a "core pick" in its sector saw the fund manager move up 10p to 269.1p, continuing its strong performance since winning promotion to the top-tier index last month.

"Normally you go into the Footsie and it's like the kiss of death," noted one trader. "You're out the next time, in and out like the Hokey Cokey, but not this one".

Burberry was another rising on analyst admiration, with the fashion brand strutting up 32p to 1,560p after Investec upgraded its forecasts, saying it was now a "sharper, slicker and more-balanced business".

At the other end, fears over the economic situation in both Spain and Italy meant the banks were following their European peers down, with Royal Bank of Scotland knocked back 0.86p to 26.89p while Lloyds and Barclays slipped 0.91p to 32.68p and 6.1p to 230.35p respectively.

Whitbread's announcement that its finance chief Chris Rogers is taking control of Costa Coffee gave an extra impetus to recent speculation that a spin-off of the coffee chain could be imminent.

Although its boss Andy Harrison moved to play down the talk by denying that there was a "hidden agenda" behind the appointment, the leisure giant still managed to set a new, 15-month high after climbing 4p to 1,870p.

Meanwhile, BSkyB finished in the red following the resignation of its chairman James Murdoch, although the move was not too dramatic as the satellite broadcaster crept back 5.5p to 675.5p.

While Ian Hannam may be wishing he had never heard of Heritage Oil, punters in the explorer finally had some good news to celebrate. The explorer has suffered a torrid 2012, with its share price losing more than a quarter since the start of the year, yet yesterday it jumped 14.3p – or 10.36 per cent – to 152.3p after announcing a new gas find in the semi-autonomous Iraqi region of Kurdistan.

But traders noting some grumblings over the find being gas and not oil. In January 2011, Heritage plummeted nearly 30 per cent in just one session following the unveiling of one of Iraq's largest ever gas discoveries, with the City instead hoping for black gold.

Cable & Wireless Worldwide pushed up 0.61p to 34.4p after Espirito Santo chose the telecoms group as one of its "silver bullet" stock choices. The broker said that – after Vodafone (down 0.1p to 175.55p) and Tata recently had their "put up or shut up" deadline pushed back – it was "increasingly likely" a bid will be made by either, or both, "at a level significantly above the current share price".

Down on AIM, JJB Sports raced up 56.1 per cent to 16p after the sports chain responded to rumours by announcing it was talking to both its bank and a "potential strategic" partner over raising funds.

The news that Indonesia's Supreme Court appears to have rejected its appeal against the revoking of four mining licenses left Churchill Mining 2.12p – or 17.35 per cent – worse off at 10.12p.

Vague takeover speculation continued to circle Futura Medical (2.5p stronger at 101p), although traders were not impressed by the talk which suggested Reckitt Benckiser (42p lower at 3,544p) as a potential bidder for the condom-maker.