The utility's shares closed 3.2 percent higher at 578 pence, having earlier touched a 6-year high of 590p after the Sunday Times newspaper reported that Scottish & Southern Energy had appointed investment bank CSFB to advise it on a possible merger with Scottish Power if merger talks with German rival EON fail.
Hopes for consolidation among the utilities also helped to lift shares in International Power 1.8 percent, while water firm Severn Trent added 2.2 percent.
The FTSE 100 closed 37.2 points or 0.7 percent higher at 5,460.8, continuing a run which has seen it sweep up from 5,130 in the last fortnight to back within range of the 4-year high of 5,515 reached at the beginning of October.
The FTSE midcap 250 closed 63.3 points higher at 8,010.9 after touching a record high 8,037.0.
"People had a good 9 months to the year and were booking a bit of profit. That was primarily the cause of the (October) downturn and the market is now moving back towards where it was," said Graham Secker, UK equity strategist at Morgan Stanley.
He added that recent acquisitions, such as Telefonica's multi-billion pound bid for mobile phone operator O2, would help keep the market's upward momentum going.
"The M&A we're seeing provides massive support in the market. You've got O2...that's (nearly) 20 billion pounds effectively coming back to UK investors to reinvest, that's providing quite a bit of support to the market," said Secker.
Oil shares hung back from the rally, with BP and Royal Dutch Shell down 0.4 percent after crude prices eased below $60 a barrel amid mild weather in the US north-east and as recovering US production eased fears supplies could run short.
Mining stocks were also weaker, with dealers attributing the fall to investors locking in profits after a strong run.
Xstrata and Antofagasta both lost 0.8 percent.
Other shares on the back foot included pest control to security firm Rentokil down 2.4 percent after news Janus Capital Management had sold 18.8 million shares.
Drugs delivery company Skyepharma was top midcap gainer, rising 6.5 percent as buyers re-emerged following the placing last week of the rump of its recent rights issue.
"There was a bit of pressure on the stock prior to the placing of the rump because everyone knew it was going to happen. That's been cleared up," said a trader.
Other midcaps saw transport companies Firstgroup and Go-Ahead Group gain 4 to 5 percent after a positive research note from investment bank Merrill Lynch.
"GOG (Go-Ahead Group) is our top pick, with most upside from structural changes. It has the lowest exposure to expiring fuel hedges, low rail-refranchising risk, 27 percent valuation upside and further upside from releveraging," the note said.
Elsewhere Aggreko added 0.7 percent after UBS raised its rating on the temporary power supply firm to "neutral".