Xstrata is currently the world's largest exporter of thermal coal but buying WMC would help it diversify into uranium and nickel and double copper production.
"If they do manage to get it, it'll be good for Xstrata. It'll be a more diversified company. Xstrata's on a low multiple, it will be able then to justify a much higher one," one dealer said. Xstrata shares finished up 5 percent and Rio Tinto fell 1 percent.
Consumer goods maker Unilever also featured high on the gainers list with a 3.2 percent increase after Morgan Stanley upgraded the maker of Lipton Tea and Dove soap to "overweight".
The FTSE 100 closed up 10 points at 4,916.2 - just below a session peak of 4,918.8 points, a new 2-1/2 year high - and the FTSE 250 bounced to an all-time record closing high of 7,257.9 as investors bought into the swarm of bid talk running through the market.
Despite the gain, traders said some investors were taking a "wait and see" approach ahead of a US interest rate decision around 1915 GMT. A quarter percentage point hike to 2.5 percent is widely expected.
On Wednesday alone, furniture foam maker British Vita said it had rejected a take-over offer, sending its shares surging 14.7 percent, and there was bid speculation surrounding Internet bank Egg, which rose 8.2 percent. Logistics group Exel, fund firm Amvescap and insurer HHG have also been recently mentioned as possible take-over targets.
Analysts welcomed the prospect of consolidation but cautioned that share price valuations would need to be re-considered.
"You have to recognise that it's a finite phenomenon and that at some point you can only squeeze share prices up so far, unless you can start substantially raising earnings. So far we're not seeing too much sign of that, so we are saying to people 'don't get too carried away'," said Nigel Cobby, managing director of European equities at JP Morgan.
Away from the M&A talk, AstraZeneca contributed a large chunk of the FTSE's gain with its 2.2 percent rise after the drug giant said it did not expect advisers to the US Food and Drug Administration to vote [nN01308614] next month on whether its Iressa cancer drug should be pulled from the market. Negative initial data from the trial were released in mid-December, causing a sell-off of AstraZeneca shares.
Pay-TV company BskyB had an erratic day, first leaping nearly 5 percent on better than expected quarterly subscriber numbers [nL02447233] and then tripping back into negative territory on concerns related to the rising cost of getting new customers. By the close, the shares were up 0.6 percent. Over 109 million shares changed hands, nearly 13 times BSkyB's 30-day average turnover.