Talk of takeovers and tax changes sent London's principal stock index to a new peak yesterday. But an early 50-point rise, following hard on the heels of recent strong performances, proved unsustainable and the FTSE 100 lost all its earlier gains to close a net 21 off at 5,296.1.

And a comparatively low volume of shares changing hands suggested that much of the rise and fall of the London market was more symptomatic of marketmaker activity than genuine asset allocation.

A report that the government is planning to abolish advance corporation tax (ACT) in order to redress an anomaly created by the July budget set the market alight at the start of trading.

The Footsie hit 5,367.3, representing a leap of more than 20 per cent since Labour took power at the beginning of May.

At first glance, the news appeared to be another market-friendly move following the creation of an independent Bank of England and last week's reports of early entry into European monetary union.

However, as dealers took a closer view of the potential scrapping of ACT, they decided it would make little difference to the market as a whole, although it would benefit stocks with a cashflow problem.

The broad market slowly drifted back to allow the beneficiaries of any changes - big overseas earners, such as BAT Industries; utilities with low tax liabilities, such as Thames Water; and companies likely to announce share buybacks, such as National Westmin- ster - to filter to the top of the performance tables.

"Essentially, the market got it wrong," said Mr Philip Collins, strategist with HSBC James Capel. "Abolition of ACT will have very little impact at market level. But it does make it more likely that companies with surplus cash or low UK earnings will be able to buy back equity."

Footsie recorded a net 34-point fall shortly before 4 p.m. and then rallied slightly in the last half hour, with the futures contract on the index trading comfortably above fair value by the close.