A shake-up in the steel sector continued to dominate European stocks yesterday, which closed flat with cautious investors awaiting an expected increase in interest rates by the Federal Reserve today.

Markets have already priced a 25 basis point rate rise, but are looking for any hints as to when the tightening cycle will end. Consumer confidence figures will also be released today, with monthly non-farm payrolls coming on Friday.

"This could be the make or break week for US indices and determine the path of the markets into the spring months," said Angus Campbell, head of sales at Finspreads.

The FTSEurofirst 300 index of top European shares slipped 0.05 per cent to close at 1,318.95 points, after touching a fresh four-and-a-half-year high at 1,321.28 earlier in the session.

Investors digested the latest batch of corporate earnings, with Fiat gaining 0.6 per cent after reporting a higher-than-expected trading profit for the fourth quarter as sales kicked in for its new Punto model.

French drugmaker Sanofi-Aventis fell 1.2 per cent as uncertainties overshadowed its higher forecast for 2005 earnings, and Vivendi Universal shares slipped 1.3 per cent after quarterly revenue rose but its music and games sales missed expectations.

"The full-year results season coming through in Europe so far looks pretty positive," said Adrian Darley, senior investment manager European equities at Gartmore Investment Management.

Other positive trends for equities included the relative stability of the dollar, continued demand from Asian and emerging markets, and support from mergers and acquisitions.

"The outlook for equities in Europe remains pretty reasonable over the next 12 months," Mr Darley said.

Merger talk buoyed the equities market, with steelmaker Arcelor the top gainer as investors speculated that Mittal may have to raise its bid.

Arcelor, which shot up 28 per cent on Friday, added 4.2 per cent after rejecting Mittal's $23 billion bid. The Luxembourg-based steel giant has vowed to fight the takeover in a battle which is expected to last four to six months.

Shares in Mittal jumped 5.1 per cent in New York, while German steelmaker ThyssenKrupp, which will get Canada's Dofasco if the deal goes ahead, lost 3.7 per cent as it went ex-dividend.

Salzgitter shares rose four per cent on takeover speculation after a report that Mittal tried to buy the German steel maker last year, dealers said.

Also fuelling merges and acquisitions interest, HMV Group Plc shares soared as it said it had received a bid approach, with people familiar with the matter saying private equity firm Permira had hired Merrill Lynch to advise on a deal.

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