Market Report: Deal-hungry Xstrata beats the sliding ftse

Although its fellow heavyweight diggers fell to earth with a bang, Xstrata managed to avoid a large part of the sell-off across the Footsie last night. Amid vague rumours that it could be casting an acquisitive eye across the Atlantic, the Swiss giant was given a boost after being picked out as one of the cheaper mining stocks.

Claiming that, intra-sector, the difference between "cheap and expensive" stocks is particularly stark at the moment, UBS said the valuation gap was likely to close and chose a number of cheap-looking stocks which could benefit.

With Xstrata one of the names highlighted among the mining groups, it managed to touch a session high of 964.6p during trading. Despite ending up 16.5p worse off at 938.5p, it still outperformed its peers – including Eurasian Natural Resources (down 36.5p to 611p) and Kazakhmys (off 48.5p at 846.5p) – which suffered heavy losses along with commodity prices.

Xstrata also became the latest to be linked with Walter Energy, as market gossips refused to give up on the US miner's takeover potential. Persistent bid speculation around the coking coal producer recently has claimed a number of big names could be possible bidders, although this hasn't stopped Walter's share price from more than halving since July.

As well as Xstrata, the latest return of the vague rumours once again suggested Rio Tinto (down 149.5p to 3,035.5p), BHP Billiton (66p less at 1,835.5p) and Brazil's Vale – among others – could be mulling over a potential approach as well, and there was also speculation claiming possible bidders could start stake-building in an attempt to thwart their rivals.

Analysts were playing down the tale, however, noting that – although Walter may have its attractions – Xstrata has recently turned its focus away from M&A activity and towards organic growth.

Traders said there was still hope in the Square Mile that Xstrata might become a takeover target itself, after constant speculation over the possibility of a tie-up with commodities trader Glencore (down 9.1p to 383.55p).

On another day of thin volumes, the FTSE 100 lost all and more of Tuesday's gains as it was pushed back 123.35 points to 5,366.8 points. Fears surrounding the eurozone continued to cause damage, and there was also disappointment over the lack of hints from America's Federal Reserve regarding the possibility of QE3.

Only one stock, supermarket giant Wm Morrison, closed ahead, although Resolution managed to limit its losses and edged down 1p to 250.9p. The insurance buyout specialist revealed Clive Cowdery has spent more than £600,000 on shares, buying in at 252.91p a pop.

Lloyds was unable to rise despite the news that Antonio Horta-Osorio is returning to the helm in January. It declined 0.65p to 24.07p after Citigroup said the worst was yet to come for the sector, predicing that the banks' share prices will not reach a trough until next year or even 2013.

Despite takeover talk around Bodycote, the heat-treating group retreated 8.6p to 247.3p. Panmure Gordon's Oliver Wynne-James said the engineer was looking "ripe for a transfer to private ownership" and added that it was a more attractive proposition than its peer Charter, which is being bought by US manufacturer Colfax.

After presiding over three profit warnings this year alone, the resignation of Neil Gaydon as chief executive of Pace saw the set-top box manufacturer power up 3p to 69.75p.

Meanwhile, with gold prices on the slide, Allied Gold Mining dropped 9.2p to 152p as the yellow-metal digger said its Simberi mine in Papua New Guinea remained unaffected by yesterday's earthquake in the country.

The clothing retailers were in a relatively good mood after Supergroup – 7.16 per cent higher at 152.2p – revealed recent improvements in trading, which meant fellow fashion chain Next was only 5p worse off at 2,586p. Still, traders were urging caution regarding the high street stocks, with one noting that they looked "vulnerable", and JPMorgan Cazenove said it expected to see more losers than winners over the Christmas period.

Down on AIM, Northland Capital's Ryan Long was doing his best to polish the smaller diamond producers. Saying that nearly a third of all Chinese brides now wear diamond engagement rings, up from a mere 1 per cent in 1994, he claimed this trend was set to continue. As a result, he kept his "buy" rating on Petra Diamonds and Stellar Diamonds, although the former was pegged back 7.5p to 111.5 while the latter stayed steady at 3.88p.

Elsewhere, tiddler Acta shot up 46.81 per cent to 8.62p after the clean energy group revealed a deal that will see its energy used by Taiwan's APFCT in its refuelling stations for environmentally friendly vehicles.