Dealers said reports that Japan's Sankyo and Daiichi Pharmaceutical plan to merge and two big purchases by Switzerland's Novartis had lifted hopes for more industry consolidation, but it was the turnaround in sentiment for Vioxx that was most significant, especially for GSK, which is working on a pain reliever in the same family of products.
"We've got the merger in Japan, Novartis sniffing around and the Vioxx news. It's focusing attention again on the sector which has been under a lot of pressure," said a trader.
With US markets closed for a public holiday and a dearth of corporate news, the broader market struggled to find direction, although drug stocks, which accounted for about 20 points of upside for the FTSE 100, helped the benchmark end up 3.6 points at 5,060.8.
In opening deals, the index touched 5,077.8, its highest level since June 2002, but turned lower as utilities, banks and telecoms all retreated to trim this month's rally.
Shares in power companies, such as United Utilities, Severn Trent and Scottish Power all fell about three percent as investors switched out of the high-yielding sector. A spike in US bond yields in the wake of a rise in inflation data last week made bonds more attractive, dealers said.
Mid-cap utilities also tracked their bigger counterparts lower, with AWG and Pennon both down by 1.4 percent and 2.9 percent, respectively.
"The high-yield sell-off has been a theme for today," said Roger Cursley, UK strategist at Investec Securities. "But it's easy on a day like today (with US markets closed) to take profits on the high yielders and switch into the drugs," he added.
National Grid Transco was the top failure, shedding 4.3 percent as Dresdner Kleinwort Wasserstein also cut its stance on the electricity provider to "reduce" from "hold".
The move in the utilities sector mirrored on among property stocks, with British Land falling 3.4 percent and Land Securities off by 3.9 percent as investors switched out of the sector as yields on the bonds looked more attractive.
Shares in William Morrison added 1.9 percent after The Sunday Times said the food retailer had raised 1 billion pounds from the sale of some Safeway stores, far more than the 600 million pounds analysts had expected it to achieve. Morrison declined to comment.
Cairn Energy rose 2.7 percent after UBS increased its target on the oil explorer to 1,360p, to lift its rally in the three days since its reassuring comments on prospects in India to 14 percent.
Among mid-caps, hotelier Millennium & Copthorne added 3 percent as a recovery in Asia helped the company double its profits, although printer St. Ives headed in the opposite direction with a 9 percent drop after it said it was unlikely that profits for the year would grow from the previous year because of competitive markets and shaky demand.