Hopes of merger mania in the European defence sector helped lift leading shares in early trade, but the rally did not last.

By 0120 GMT, the FTSE 100 Index stood at 5597.8, up 15 points as initial optimism gave way to market caution.

Stocks in Scottish Power fell 4.5% despite its confirmation of merger plans with US group PacifiCorp.

Dealers said the merger had been long-anticipated and also cited cautious press comments about the link-up.

Supermarket shares were laid low by ASDA which fell 2.4%. The stocks fell after retail research group Verdict warned that next year would be tough for the industry, adding that a price war may be unavoidable.

Among the winners are BAe shares which shot up 3.6% after the group confirmed it was in talks over possible mergers with Germany's DaimlerChrysler Aerospace.

Shares in retailer Sears rallied 3.4% and First Leisure rose 8.9% as both stocks benefited separately from bid speculation.

GEC's admission last week that it may also be seeking a merger partner left its shares leaping 12p to 546p, which in turn helped GKN up 3.5p to 677p.

The GKN gain came despite its unveiling of plans to spend £335m on US aerospace materials group Interlake. The positive start came as weak manufacturing output figures spurred hopes among analysts that the data would encourage the Bank of England to cut interest rates on Thursday.

Shareholders in Imperial Tobacco and Gallaher waited with baited breath for the outcome of the High Court decision on whether a group of smokers are allowed to bring an action for injury against the two companies.