British fund manager Fidelity - at one point London Stock Exchange's biggest shareholder - has sold its stake in the long-standing bid target, sources claimed yesterday.

The news comes as the head of the Deutsche Boerse said he is hopeful of a merger with rival Euronext while other sources said the LSE and Euronext's advisers have met in past weeks to discuss a tie-up.

Exchanges are under pressure to consolidate to boost volumes, create economies of scale that reduce trading costs and to attract more companies to list on the market.

Shares in the LSE have surged around 150 per cent over the past 12 months while it has been courted by European rivals Deutsche Boerse, Euronext, Australian bank Macquarie and American exchange Nasdaq, although it has rejected offers as being too low.

Fidelity, which once held ten per cent of the LSE's shares, sold the remaining holding last week, sources said.

Stock exchange filings over the past year show that Fidelity has been reducing its stake in the LSE, Europe's largest share market.

A filing from the fund manager on February 7 showed it owned 0.87 per cent of the exchange, which has fended off a slew of takeover attempts in just under a year and a half. However, Fidelity International has declined to comment on specific holdings.

Trading at around 1036p, the LSE is valued at around £2.6 billion.

In Frankfurt, shares in Deutsche Boerse were down 1.40 per cent at 111.68 euros. In Paris, shares in pan-European Euronext were down 1.7 per cent at 68 euros.

Dealers said the focus of any likely takeover or merger in the shorter term would be the London exchange.

The prospect of any consolidation involving the LSE meant its shares should remain at or near current levels.

"Everyone thinks that LSE won't be the LSE in six months to a year's time. So the question is: Will it be part of Euronext or some other exchange?" said a dealer.

Industry watchers said the LSE's lofty valuation reflected its strategic position as a place for companies to list their shares, given the SarbanesOxley act in the United States has ushered in new compliance rules that are considered by some to be too onerous and expensive.

"There had always been a presumption that as equity distribution platforms globalise, they would consolidate around one or two key

platforms and there had always been a presumption that that would be New York," said Brian Magnus, co-head of UK Investing Banking at Morgan Stanley.

"I think Sarbanes-Oxley has made the world think that actually that's not right, that actually it's more likely to be London."

The dip in Deutsche Boerse shares came despite the German exchange's chief executive saying he was hopeful of a merger with Euronext.

Reto Francioni told German business daily Handelsblatt a merger with Euronext may be possible before Euronext's May 23 AGM.

Meanwhile, the LSE and Euronext's advisers have had talks about a possible tie-up in past weeks, sources said.

They said that the LSE's share price has increased the London exchange's weight in a possible all-share deal.

The Euronext shareholder meeting in May has also focused the attention of Paris-based exchange on making progress in its tie-up plans, the sources added.