MARKET REPORT - LONDON

LONDON'S equity market suffered another significant setback yesterday but the fall was limited by the surprise announcement of a £5.4 billion merger between Sun Alliance and Royal Insurance, two of Britain's biggest composite insurers.

The news was the latest in a series of bombshells to hit the market over the past two trading sessions and provided a substantial cushion for the FTSE 100 index, which includes seven pure insurance stocks. Several banks, as well as BAT, the tobacco group, have large scale insurance interests.

The other big worries for the market, the outcome of the local elections across England and the market's initial response to the collapse of the BT/Cable & Wireless merger talks, although upsetting, were relatively well absorbed. Confirmation that Midlands Electricity had received a number of takeover approaches in the wake of the Government's veto of bids for electricity stocks by National Power and PowerGen was another reassuring signal for the market, with a number of utility stocks making good progress.

London was also reassured by a comforting opening performance yesterday by Wall Street, which responded positively to an April non farm payroll report showing much lower than expected job creation in the US.

Over the week, during which the Footsie always looked likely to drop back through the 3,800 level, the index retreated 81.2 or 2.1 per cent, while the Mid 250 lost 1.2 per cent.