BAE Systems led the FTSE 100 index to its best level in nearly six years, with the defence contractor rallying after the Serious Fraud Office (SFO) dropped an investigation that threatened to undermine its jet fighter contract with Saudi Arabia.

The SFO said yesterday that it was abandoning a two-year investigation into allegations that BAE had set up a £60 million fund for members of the Saudi Royal Family to ensure that they kept doing business with the UK firm.

The probe had put at risk a BAE-led sale of Eurofighter Typhoon fighter jets to Saudi Arabia, which analysts have valued at about £10 billion. BAE was ahead 23p to 420p and Rolls-Royce, another member of the Eurofighter consortium, gained 3p to 426.75p.

In the wider market, the FTSE 100 added as much as 31.4 to 6,259.4, while the FTSE 250 pushed into record territory with a 39-point gain to 11,087.

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Prudential helped the trend, rising 16.5p to 712p after a tip from Merrill Lynch. The US said that the Pru can restructure with its UK unit to cut costs, and may accompany the move with an orphan asset attribution that could release £2.5 billion to shareholders. Merrill repeated "buy" advice with an 830p target price.

Reckitt Benckiser added 30p to £24.02 after ABN Amro promoted the Cillit Bang maker to its "buy" list in a review of the consumer goods sector. The Dutch broker was confident that 2007 will be a strong year as European demand improves, new products drive sales growth, costs become more benign and cost-cutting comes through from Reckitt's purchase of Boots' over-the-counter medicines business.

British Land was ahead 40p to £16.68 on a typically vague Friday-style rumour that it could face a takeover approach from a Russian businessman. Sir John Ritblat, the property group's departing chairman after two decades at the helm, sold most of his stake in the property group last month.

Among the fallers, Gallaher retreated 5p to £11.50 after Japan Tobacco agreed a friendly takeover at £11.40 per share. All eyes are on Altria, the US owner of Philip Morris, and Altadis, of Spain. While the former would face antitrust restrictions and the latter could not afford it, analysts have speculated that the two could team up to launch a counter-bid.

Meanwhile, Imperial Tobacco faded 22p to £19.93 after Citigroup said that Altadis looked a more likely takeover target than the UK group in the present round of consolidation.

Northgate, the mid-cap support services company, moved up 26.5p at £11.30 after rejigging its debt with the issue of £175 million in loan notes.

IMI faded 12.75p to 506.5p after a mixed trading statement. The engineering group reported 4 per cent organic sales growth for the full year and said that the overall climate was "broadly positive", despite weak US truck and automotive markets.

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