Smith and Nephew and Friends Life were said to be likely subjects for bids, and BT confirmed it might expand into mobile communications.

The benchmark FTSE 100 was down 0.2 percent at 6,735.93 points by 1505 GMT, failing to sustain a 1.1 percent rally sparked by China's interest rate cut on Friday.

Petrofac sank 25.4 percent, its worst one-day percentage drop ever. The oil and gas services firm said it expected 2015 net profit of around $500 million (318 million pounds), below consensus estimates.

However, the index was supported by a Bloomberg report that Stryker might bid for medical firm Smith & Nephew, which surged as much as 9.9 percent before paring gains to trade 3.7 percent higher.

Jasper Lawler, a CMC Markets analyst, said any deal could boost the sector after high-profile bids, like Pfizer's for AstraZeneca, failed to materialise.

Friends Life rose 5.3 percent after Aviva said on Friday it had agreed terms on a possible deal to buy its rival for 5.6 billion pounds ($8.8 billion), as British pension reforms put pressure on insurers to find new business. Aviva dropped 5.2 percent on the news.

Traders said the deal made strategic sense for the insurer, but the 15 percent premium to Friends Life's share price was not good value.

BT rose 3.1 percent after being linked with the purchase of EE and O2.

"The Aviva deal smells like an expensive deal, but perhaps they're staking their claim, knowing that competitors will shy away from a challenge," said Chris Beauchamp, an analyst at IG.

"For BT, it's necessary for them to do a deal to compete on a broader front. Perhaps when details of the price come out, there will be similar falls in BT (as in Aviva)."

(Editing by Ruth Pitchford)

By Alistair Smout and Sam Wilkin