After a strong rise on Monday, London shares slipped back.

Investors were taking profits after a large rally in stock values over the past few weeks.

The City was gripped with merger fever on Monday with a succession of big corporate deals

The FTSE 100 finished 130.9 points, or 2.3%, higher at 5848.4, just short of its session best of 5854.4.

The index has already jumped 243 points in the last two sessions.

City traders started a new week with news of Siebe's plans for a £7.6bn merger with BTR, while insurer Guardian Royal Exchange confirmed it was looking for a suitor.

BTR shares, which on Friday closed down nearly 50% on the year, surged 40% to 133p.

Siebe's shares were less buoyant, adding 28p, or 13%, to 243p by the close.

The FTSE 100 became even more bullish following the news that Deutsche Bank was in advanced talks with US investment bank Bankers Trust.

The Dow also moved higher to stand just off its all-time closing best of 9337, reached on 17 July.

Merger talk in the internet sector also galvanised the positive mood.

"We have seen a liquidity driven rally both in the US and in the UK," said Charterhouse's senior salesman James Dewhurst. "The deal fever is really taking hold in the US, but the rally in the UK is very narrow despite the decent volumes."

GRE shares ended up 14% at 350.5p, as the company examines a number of options which may or may not lead to an offer for the company.

Independent oil exploration firms continued to have a rough time, with the price of crude still below $12.

EMI shares slid 6.9% ahead of Tuesday's interim results and after German media group Bertelsmann quashed speculation it was in talks with the company.