INNOGY, the gas and electricity business which owns Thames Water, saw its shares leap 20% after the company confirmed it was in takeover talks, most likely with the German giant RWE.

But analysts were divided about whether news of the talks would smoke out any of Innogy's rivals. Most agreed that if one were to emerge, it would likely be a continental power utility like Italy's Enel.

Innogy is thought to be keen to do a deal, but is happy to wait to see if RWE tables a formal bid. One source close to the company said: ''It is still early days yet. We are only at day one. We have got to wait to see if [RWE] bid.''

Innogy has made waves in recent months by building up a mix of power generation and

supply businesses, including nPower, after it was hived off from National Power in October 2000.

Mark Robinson, an analyst at Commerzbank, said: ''I think there's a good chance we'll get a deal. Innogy are a UK-focused business, they have an interesting set of assets and they're not encumbered with wires and water businesses.''

An auction looked unlikely, not least because Innogy's board seemed to welcome the approach in a statement on Sunday, and analysts said the company had been touting itself for a sale for months.

An Innogy spokesman denied the company was trying to start an auction process, however. He said: ''We have a clear strategy, and a clear idea how we will extract value from it.''

RWE, based in Essen, Germany, is firm favourite among analysts to clinch the company, possibly tabling a bid of between 275p and 300p per share, or (pounds) 3.3m. RWE was reported to have had a (pounds) 2.9bn bid rebuffed late last year.

Innogy's shares closed up 20%, or 41p, at 251.25p.

RWE, which bought Thames Water for (pounds) 4.3bn last year and has a market capitalisation of (pounds) 14bn, declined to comment. But a spokesman said its acquisition strategy focused on buying electricity, gas, water and waste management companies in the US and Europe.

Analysts said bids from UK utilities looked unlikely. ScottishPower, which admitted it had made an informal approach, ruled itself out from bidding ''at present''.

Scottish & Southern Energy was thought unlikely because of its reluctance to enter a bidding war. The Perth-based utility has a reputation for only entering talks when it can be sure of extracting value.

Instead, any competition for RWE's potential bid seems likely to come from the continent. Analysts said Italy's Enel, France's Suez and Spain's Endesa were potential suitors to buy Innogy.

Electricite de France, which owns London Electricity, was less likely to bid, however. EDF could table a bid, but the addition of Innogy's seven million customers could mean that it fell foul of regulators.

Eon, which is buying Powergen, was also unlikely to make a play, with Nigel Hawkins, analyst at Williams de Broe, suggesting Eon was too busy digesting Powergen's US businesses. ''They have got enough with the Powergen acquisition,'' he said.

Faced with increased compet-ition at home, Europe's power giants are keen to tap profitable markets abroad, and the UK is an attractive target because it was the first market to deregulate.