By Atul Prakash
LONDON (Reuters) - A merger approach to global diversified miner Rio Tinto (L:RIO) boosted the UK mining sector on Tuesday and resulted in the FTSE 100 (FTSE) to fall less than its major European peers.
Appetite for equities was dented by weak data from Germany showing industrial output fell far more than expected in August and posted its biggest drop since early 2009, while British manufacturing growth slowed in August, adding to signs of a cooling in the economic recovery.
The blue-chip FTSE 100 fell 0.6 percent to 6,522.04 points by 1044 GMT, against a 0.8 to 1.5 percent drop for Germany's DAX (GDAXI), France's CAC (FCHI), Spain's IBEX (IBEX) and the pan-European FTSEurofirst 300 index (FTEU3).
Airlines IAG (L:ICAG), EasyJet (L:EZJ) and Ryanair (I:RYA), the top three fallers in the FTSE 100 index, dropped 4.1 to 5.6 percent on concerns that a confirmed Ebola case in Madrid could hurt passenger demand.
However, the UK mining index (FTNMX1770) rose 1.2 percent, led by a 4.7 percent surge in Rio Tinto after the miner said on Tuesday it had rejected a merger approach from smaller rival Glencore (L:GLEN) to create a $160 billion mining and trading giant in August.
"It shows that there is some need for companies in the sector to consolidate their businesses because commodity prices are falling, there are excess capacities and costs are high," Christian Stocker, strategist at UniCredit, said.
"Any such deal has the potential to stabilise the performance of the sector. But the scenario of a mega company controlling production, distribution and prices of commodities in such a big way is also not very healthy for the market and relatively smaller players."
Analysts said that a deal was still possible, and could benefit both the companies.
"We see scope for a potential tie-up to deliver genuine 'value-add' from a synergy perspective," HSBC analysts said.
"The most obvious areas we see are in marketing (iron ore) and Australian coal ... our 'first stab' for potential synergy size is in the low-single-digit billions of dollars based on what we see as the potential 'low-hanging fruit'."
Citi analysts estimated that the two companies could save around $500 million just by combining their neighbouring coal operations in Australia.
(Additional reporting by Alistair Smout; Editing by Tom Heneghan)