Carphone Warehouse spearheaded the advance in which the FTSE 100 bounced back from a 150-point loss to close higher on Thursday.
Shares in the mobile phone and broadband internet group jumped 8.1 per cent to 328½p on speculation of a 400p bid approach from Best Buy (NYSE:BBY), the largest consumer electronics chain in the US.
Such rumours have been doing the rounds since Best Buy, which has a strategic partnership with Carphone, disclosed a holding of almost 3 per cent in September.
Traders thought Thursday's rise was exacerbated by short sellers buying back positions. Carphone is one of the most "shorted" blue-chip stocks with about 15 per cent of its share capital on loan.
With a market value of $20bn and no debt, Best Buy could afford to buy Carphone, and founders Charles Dunstone and David Ross might be tempted to sell their combined 53 per cent holding before changes to capital gains tax kick in this April.
In the wider market it was an extremely volatile session. Down 148 points before Wall Street opened, the FTSE 100 staged a remarkable recovery to close 42.5 points, or 0.7 per cent, higher at 5,879.8. The index still closed down 8.9 per cent on the month, its worst start to a year for five years.
The turnround on Thursday came after executives at US bond insurer MBIA (NYSE:MBI) said Standard & Poor's had indicated that the company's restructuring plan would be sufficient to retain a triple-A rating.
The FTSE 250 eased 26.7 points, or 0.3 per cent, to 9,881.8. Market turnover was heavy with more than 6bn shares changing hands. Traders said a number of large "program" trades had hit the market on Thursday and there were rumours that several quant funds had been liquidating positions.
BG Groupwas one of the stocks caught up in the program trading. As a result its shares moved up 5.3 per cent to £11.
In the same sector, Tullow Oil added 4.7 per cent to 597p after selling its 11 per cent stake in the M'Boundi oil field in the Congo for $435m to Korea National Oil Corporation, the company that considered an offer for Burren Energy last year.
On the downside, life assurer Friends Provident was marked 10.6 per cent lower at 138.8p after a poor trading update.
Housebuilding stocks were also on offer after the latest survey from the Nationwide showed UK house prices had declined for a third consecutive month in January as the market continued to cool. Persimmon fell 3.9 per cent to 771p, while Taylor Wimpey slipped 2.8 per cent to 179.3p.
Rio Tinto added 2.8 per cent to £49.56 on reports that the mining company would consider a higher offer from BHP Billiton (NYSE:BHP), 2.1 per cent stronger at £14.77. BHP's current offer is three of its shares for every Rio share.
"We feel an increase in the range of 33 per cent to 48 per cent is needed in order to win shareholder support," Liberum Capital said.
Johnson Matthey, the precious metals and catalysts group, added 3.8 per cent to £18.58 after Citigroup reiterated its "buy" recommendation citing the attractions of the company's Process Technologies business, which analysts visited this week.
"This used to be a mid-single-digit growth business but the high oil price (and tighter legislation) is proving transformational - enabling management to now talk in terms of double-digit growth," analyst Sophie Jourdier said.
In the mid-caps, Mitchells & Butlers handed back some of Tuesday's 18 per cent gain.
Its shares dropped 5.8 per cent to 445¾p as traders took the view that a firm offer for the pub operator was unlikely to emerge with the credit markets still in a state of flux.
Landsbanki analyst Kate Pettem pointed out that M&B had a large pension fund that would require a top-up in the event of a takeover.
Late in the session there were rumours of a 500p a share bid from Whitbread, up 2.3 per cent to £13.60.
Rank, the casino and bingo club operator, improved 0.6 per cent to 90¼p. After the market closed Guoco Group, the Asian gaming company that owns London's Clermont Club, declared a raised holding of just over 5 per cent.