Britain's leading share index had edged higher by midday on Wednesday, led by hotel groups after Blackstone agreed to buy Hilton, but overall activity was thin as U.S. markets are closed for a holiday and investors await an interest rate decision on Thursday.
At 1051 GMT the FTSE 100 was up 18.4 points, or 0.28 percent at 6,658.2, despite the pound hitting a 26-year high against the dollar and Britain's financial watchdog finding poor practice by intermediaries and lenders in the UK subprime mortgage market.
The Bank of England, which begins a two-day rate-setting meeting on Wednesday, is widely expected to raise interest rates by a quarter of a percentage point to 5.75 percent on Thursday.
The European Central Bank is also due to deliver a rate decision on Thursday, with analysts expecting it to keep its core rate on hold at 4 percent this time but increase it in September.
The market seems to have weathered, obviously, with cable (the pound-dollar exchange rate) going through new highs, potentially ramifications for our exporters, retailers and oil-dependent manufacturers, said Martin Slaney, head of spread betting at GFT Global Markets.
A rate rise is factored in for tomorrow. The question is now just, not if but when we will hit 6 percent.
InterContinental Hotels surged 4.8 percent to top the FTSE 100 gainers, lifted by U.S. private equity firm Blackstone Group's takeover deal for Hilton Hotels Corp. for about $20 billion plus debt, the richest in a series of recent private equity offers for hotel companies.
The direction is very much dictated by M&A. The focus has shifted from risk aversion to not wanting to be out of the next M&A deal, Slaney said, adding that volume was light with the Wall Street closed on the Independent Day holiday.
Whitbread, which runs Permier Travel Inn budget hotels, climbed 2.6 percent and hotelier Millennium & Copthorne tacked on 3.6 percent.
Property stocks also benefited from the Hilton takeover on the valuation of their assets, with British Land up 2.3 percent, Land Securities adding 1 percent and Hammerson rising 1.3 percent.
UK SUBPRIME MARKET Banking shares were mixed, with Barclays up 1.4 percent and Alliance & Leicester adding 1.2 percent. But HSBC and HBOS were slightly weaker.
The Financial Services Authority, in a review of the risky subprime mortgage sector, said it found weakness in responsible lending practices and in the assessment of whether consumer could afford a mortgage.
Trouble in the U.S. subprime mortgages, highlighted by the problems in two Bear Stearns-managed hedge funds, had pushed global markets onto the backfoot last month.
Morrison Supermarkets advanced 0.8 percent after the Daily Mail said its investors could be in line for a 1 billion pound windfall as the group pressed ahead with plans to sell 25 shopping centres.
Index heavyweight Vodafone eased 0.2 percent. The mobile phone giant was until now the favourite to win a pan-European iPhone deal, but Germany's Rheinische Post said Deutsche Telekom's T-Mobile would have exclusive rights to sell the much-hyped phone in Germany when it goes on sale in Europe later in the year.
Man Group, the world's largest listed hedge fund group, and Lonmin fell after trading ex-dividend.
ITV slipped 0.7 percent after the broadcaster said net advertising revenues for its main channel ITV1 were down 9 percent for the six months to end-June. (Additional reporting by Michael Taylor)