LONDON MARKET: Merger rumours boost share prices

UK STOCKS may rise this week as faster economic growth fuels profits. Royal & SunAlliance, AstraZeneca and Pilkington are all forecast to report rising sales or earnings. Gilts, on the other hand, may fall as reports are expected to show rising house prices, heightening fears of a further rate increase next month.

"The outlook for gilts isn't positive," said Adam Chester, chief economist at the Halifax. "The house price numbers will be most important next week. The Bank of England has clearly been looking at them closely."

Expectations of more mergers may help extend gains among telecommunications stocks, such as Energis, and among banks, including National Westminster, Royal Bank of Scotland and Abbey National.

Reports that Nomura Securities, Japan's largest brokerage, and ABN Amro, Europe's fifth-largest bank, are both interested in buying parts of NatWest, and talk that France's Societe Generale could be the target of a bid from Germany's Deutsche Bank, have fuelled rumours of alliances in the industry.

A report on Friday showed the UK economy growing faster than expected in the third quarter, while the FT-SE 100 benchmark index climbed 1.8 per cent. An industrial trends survey to be released on Tuesday is likely to confirm this picture.

AstraZeneca's third-quarter earnings, due on Thursday, are expected to be driven by higher sales of its Losec ulcer drug, the biggest-selling drug in the world, and its Zestril heart pill.

SmithKline Beecham and Imperial Chemical Industries were among companies that beat their earnings estimates last week. Still, SmithKline slid 3.1 per cent to 733p after a regulatory setback for its new diabetes drug Avandia.

Colt Telecom Group, British Telecommunications and Energis, some of last week's largest gainers, may extend their advance in coming days on expectations of more takeovers. Speculation was fuelled by Mannesmann's offer to buy Orange for pounds 20.7bn on Thursday.

The bid from Germany's largest mobile phone operator has prompted speculation that Vodafone AirTouch may bid for Mannesmann, and put pressure on other phone companies to ally in order to compete. Shares in Colt leapt 17.4 per cent to 1,793p last week, BT advanced 11.7 per cent to 1,067.5p, and Energis climbed 6.8 per cent to 1,829p.

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