European stock markets scaled three-and-a-half-year highs on Monday, with gains fuelled by takeover activity in the UK and merger speculation elsewhere.
Dutch telecoms group KPN surged seven per cent after the Wall Street Journal reported that Spanish peer Telefonica had approached its rival over a €20 billion takeover.
Telefonica denied any negotiations had taken place and KPN said it had not been approached.
Shares in British health and beauty group Boots rallied four per cent on news the company is to buy Alliance UniChem to create a pan-European drugs retailer and distributor. Alliance Unichem rose one per cent.
The pan-European FTSEurofirst 300 index ended 0.8 per cent stronger at 1,239.0 points, its highest level since late-April 2002 and pushing up gains to 19 per cent so far this year.
Some fund managers, however, were cautious on company earnings, which have helped the FTSEurofirst index become one of the best performers globally among regional indexes.
"As the year goes on however, the base of comparison will get more difficult and I am not convinced we are going to see as big a set of positive surprises next time as we had earlier in the year," said Jeffrey Taylor, head of European equities at Invesco Perpetual, part of fund firm Amvescap.
"So, net earnings revisions will get tougher in the third and fourth quarters of the year and that might be something that the markets need to pause and think about."
Around Europe, London's FTSE 100 index closed 0.4 per cent firmer and Zurich's SMI jumped 1.5 per cent.
Paris's CAC-40 rose 0.5 per cent to 4,622.5 and Frankfurt's DAX rallied 0.7 per cent to 5,082.1 points, with both indexes at their strongest levels since April 2002.
"I am not looking for a major market pullback but I do think that at the very least, a period of consolidation is needed," said Mr Taylor.
Stronger-than-expected economic data also supported stocks.
In the eurozone, where exporters are benefiting from a weakening currency, the RBS/NTC Purchasing Manufacturers' Index rose further to a seven-month high of 51.7 in September from 50.4 in August, boosted by faster growth in output and new orders.
The data entrenched expectations the European Central Bank will take a more hawkish tone at its meeting tomorrow, but few expect the bank to raise interest rates from historic lows of 2.0 per cent until well into 2006.
"The stronger-than-expected manufacturing PMI is more cannon fodder to the ECB to justify a more hawkish slant," said David Brown, chief European economist at Bear Stearns.
The British PMI showed manufacturing activity unexpectedly expanded at its fastest pace in six months.