Defence giant BAE Systems saw shares leap ahead today after it confirmed talks over a potential merger with aerospace group EADS.

BAE leapt to the top of the FTSE 100 Index risers board after an 11% shares boost, up 34.9p to 363.6p, following news of the possible tie-up - which would create the world's biggest defence and aerospace firm with combined sales of £60 billion.

The wider Footsie failed to hold on to early session gains - down 10.1 points to 5782.1 - amid investor caution despite news that German lawmakers had decided not to block the eurozone bailout fund.

Germany's Constitutional Court rejected a petition that would have prevented the country from approving the European Stability Mechanism (ESM) and risked throwing the region's crisis-response into disarray.

With Germany committed to the bailout fund and European Central Bank president Mario Draghi last week unveiling new initiatives to save the euro, there are hopes that the crisis in the single currency bloc might ease.

But the stock market response was muted as the ruling came with conditions, namely that Germany's liability for the ESM is capped at 190 billion euros (£152 billion) by law.

The decision was also cautiously received on the continent, where the Dax in Germany was ahead 0.5% and the Cac-40 in France advanced 0.2%, while there was added uncertainty as the US Federal Reserve's two-day meeting starts today.

The pound fell against a strengthened euro, to 1.25 euros, as hopes mounted of a solution to the eurozone crisis.

But sterling rose to 1.61 US dollars in anticipation of more quantitative easing in the US.

In corporate results, B&Q and Screwfix owner Kingfisher revealed the wettest summer in 100 years had cost the group £30 million in profit.

In the wake of a 17% slide in bottom line pre-tax profits to £364 million, Singer Capital said the results were below expectations and that downgrades to full-year forecasts were "inevitable". However, shares recovered from an initial fall to stand 2.7p higher at 275p.

Barratt Developments was 6% lower in the FTSE 250 Index as the company's full-year results triggered a fall back from recent highs.

The housebuilder said profits rose 159% but the stock slipped 10.9p to 158.8p as analysts said the delay of a dividend payment until next year signalled a degree of caution.

Chocolatier Thorntons cheered investors as it said it was "heartened" by recent trading after its Best of British range gave a boost to its turnaround plans.

The group's note of optimism came despite a sharp fall in underlying full-year profits to just £850,000, as it counted the cost of weak Christmas trading and some of the most challenging conditions in its history. Shares were 1.6p higher at 28.9p.

The biggest Footsie risers were BAE Systems ahead 34.9p to 363.6p, Lloyds Banking Group up 1.4p at 38.5p, BT Group up 8.7p to 235.2p and Royal Bank of Scotland ahead 10p at 274.7p.

The biggest Footsie fallers were Hargreaves Lansdown down 24p to 630p, Anglo American down 53.5p to 1901.5p, Admiral Group off 28p to 1091p and BG Group down 31p to 1239.5p.