Shares in Electrocomponents and Premier Farnell were in demand on renewed hopes that Britain’s two biggest electronic widget distributors could merge.

Marc Van’T Sant, a Citigroup analyst, argued that there had never a been better time for the two to start talking. Electrocomponents is nearing the end of an investment programme after stabilising its domestic business, providing an ideal opportunity to meet its smaller peer’s new team, he said. Cost savings from a union would boost earnings by 35 per cent, equivalent to more than 70p per share for both parties, and the combined group’s earnings would make it look cheap against sector peers.

Citigroup upgraded Electrocomponents to “buy”, from “sell”, sending its shares up by 12½p to 290½p. Premier Farnell rose 9p to 195p, although the broker kept its “hold” advice in case management fails in its turnaround plan.

The wider market struggled for direction, with the FTSE 100 finishing up 3.9 points at 6090.3. Falls among miners and defence contractors offset strong financial issues, with Barclays up 9½p to 686½p and Lloyds TSB rising 4p to 543½p on a stronger than expected trading statement from Royal Bank of Scotland, up 76p to £19.16.

Legal & General beat a weak insurance sector, rising 2p to 153½p after Deutsche Bank said that the insurer’s review of its capital requirements has scope to surprise, given the additional £1 billion surplus in its UK life business. The broker moved to “buy”, from “hold”, saying that L&G could end up giving nearly £2 billion to shareholders over the next two years.

That upgrade came amid persistent speculation about a big merger among the European insurers, with Prudential, down 14p at 652p, rumoured to be among those studying the numbers on a move for L&G.

Pub operators moved up after Gordon Brown’s Pre-Budget Report tweaked the rules for forming real estate investment trusts (Reits). Companies will be allowed to sign up without meeting the requirement that at least three quarters of their assets and income come from property rents, provided that they meet that condition within a year. That will help to convince companies on the cusp of conversion, analysts said. Enterprise Inns rose 19p to £13. Wolverhampton & Dudley Breweries was up 56p at £17.58. Converting to a Reit could boost their fair value by 20 per cent because of tax savings and a clearer valuation of the property vehicle, according to Cazenove, the broker.

Housebuilders climbed, but it had little to do with the Chancellor’s moves to encourage zero-carbon homes and to delay the introduction of a new land tax system. Traders were more interested in research from ABN Amro, with the broker predicting another wave of consolidation that could leave Redrow and Bovis Homes vulnerable. ABN said that predatory interest from buyout funds was pressing builders to increase borrowing. The cash raised would be better spent on acquisitions than shareholder returns, because companies could add more value through increasing their size and land banks in the highly fragmented sector, it said. ABN saw Barratt Developments, Wimpey and Persimmon as likely to be the acquirers, but kept “buy” advice on all stocks, based on hopes of a sector rerating.

Persimmon rose on optimism before its year-end trading update, due on December 21. Analysts believe it could raise its cost savings target from last year’s purchase of Westbury. Persimmon rose 35p to £15.14, Redrow was up 13p to 700p and Bovis gained 18½p to £10.59½.

BSS, the plumber’s merchant, rose 26p to 450p, despite buyers losing rights to its latest dividend, as dealers reported vague talk of bid interest.

Bodycote eased ½p to 243p on worries that a trading statement may disappoint. As well as falling American car production and dollar weakness, the coatings and heat treatment specialist may have lost business because of delay to Airbus’s A380.

• New York: Investors paused after two days of strong gains on Wall Street. The Dow Jones industrial average closed down 22.30 points at 12,309.30 at midday.

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