South African financier Mark Paulsmeier says he has backing from an American firm called Oakwell Associates for a 410 pence a share bid for M&S. Analysts brushed aside the prospect of such a bid succeeding earlier in the day, but dealers said hopes of a take-over drew US buyers into M&S just before the market closed, pushing its shares up 1.8 percent.
Steelmaker Corus was the worst performer, down 3.4 percent after Japanese steel makers negotiated a deal to pay significantly more for iron ore - a move that analysts said would pressure margins across the sector. But news of higher prices for raw materials helped mining stocks, with Antofagasta and Rio Tinto both up over 1 percent.
By the close of play, the FTSE 100 benchmark index was down 27.9 points at 5,032.9 - off session lows but still recording its worst one-day drop in six weeks. Dealers said concerns over rising interest rates hampered the market, as well as a weaker start on Wall Street, where the Dow Jones industrial average was off about 40 points.
"This is a reflection of a market that was in a little bit too optimistic of a mood in January and early February," said John Smith, investment director at Brown Shipley. "We tend to think that all the news flow should be good and the market will rise every week but of course along the way there's often aggressive profit taking."
Stuart Fraser of private client money manager Brewin Dolphin said he expected buyers to return to the market before long.
"It's just a natural correction that we're seeing and I wouldn't be surprised to see buying coming in a bit lower down.
Financial stocks accounted for much of the pressure on the market, led by a 2.3 percent fall for fund firm Amvescap. Sector peers Man Group and Schroders ended down nearly 2 percent each.
"Schroders is something we were happy to do some selling on because we felt, above 5,000 on the FTSE, market-related stocks were more prone to aggressive profit taking than others," Brown Shipley's Smith said. Elsewhere in the sector, investors got out of banks HBOS and Barclays, down 1.6 percent and 1.2 percent respectively.
In the supermarket sector, Sainsbury shares finished down 2.6 percent as the family's main charitable foundation said it had sold a 2.6 percent stake in the grocer.
Hotels and gaming group Hilton provided another drag, down 2.3 percent in the wake of a broker cut and a Dutch court ruling. On Monday the Dutch Supreme Court upheld the ruling of a lower court, which prevents Hilton's gambling operator Ladbrokes from offering Internet-based services in the Netherlands. Dealers said a Smith Barney downgrade to "sell" also weighed on the stock.
In the mid-cap arena, house builder Wimpey rose nearly 4 percent after its 2004 profits rose more than expected, helped by a strong performance from its US business.