* FTSE 100 up 0.6 percent
* Miners rally as gold above $1,000 an ounce
* Investors welcome return of M&A activity
By Simon Falush
LONDON, Sept 8 (Reuters) - Britain's top share index rose to its highest level in 11 months on Tuesday, boosted by manufacturing data, the prospect of a revival in takeover activity and a rise in mining stocks on the back of the higher gold price.
By 1045 GMT the FTSE 100 was up 27.96 points, or 0.6 percent, at 4,961.14, after reaching an 11-month high of 4,971.99.
Prices built on Monday's advance, when the FTSE 100 closed at 4,933.18, spurred by strong gains in confectionery group Cadbury which rejected a $16.7 billion bid from North America's biggest food group Kraft Foods.
Miners added the most points to the index, enjoying a rally against a backdrop of rising metals prices, with gold jumping through the psychological $1,000 an ounce mark to its highest level since February, boosted by a weak dollar and investors looking for a hedge against inflation.
Gold miner Randgold Resources gained 3.3 percent, while Kazakhmys, Rio Tinto, Vedanta Resources and Lonmin rose 3.2-5.5 percent.
Along with expectations that merger activity might prompt further sharp gains in equities after the Cadbury news, economic data reinforced a view that the domestic UK economy is emerging from recession.
British manufacturing output rose at its fastest monthly rate in 1-1/2 years in July, with factory output rising 0.9 percent, three times faster than analysts had expected which helped push up sterling as well as supporting stocks.
"The solid manufacturing data have given markets a bit of a lift, it tells us that de-stocking phase is coming to an end and that restocking has possibly started," said Peter Dixon, economist at Commerzbank.
MIXED BAG
Not all the economic news was positive. A survey by the British Retail Consortium showed UK retail sales fell on the year last month for the first time since May as cost-conscious consumers refrained from splashing out on non-essential items.
However, investors sought to accentuate the positive and along with miners, energy stocks also motored higher.
The sector was supported as the price of crude oil rose more than 2 percent to beyond $69 a barrel, underpinned by comments by delegates from an OPEC meeting starting on Wednesday, which analysts say may see more rhetoric on compliance but no change in output targets.
Heavyweights BG Group and BP put on 2.1 percent and 0.2 percent, respectively.
Cadbury rose 1.7 percent amid hopes Kraft might have to raise its offer by up to 40 percent after shares in the world's second biggest confectionary maker increased by almost half on Monday on news of the approach.
Cazenove analysts said Nestle might make a counterbid for Cadbury, perhaps in a joint approach with U.S. chocolate group Hershey Co. Nestle's chief executive Paul Bulcke declined to comment directly on Monday. He said the company had no major acquisitions planned although it was always open to opportunities.
Heavyweight Vodafone was a major boon for the index, up 2.2 percent, with traders citing relief that it was not involved in expansion in the UK market after Deutsche Telekom and France Telecom said they are in launched exclusive talks to merge their British mobile units.
It was a mixed picture among life insurers. Friends Provident and Standard Life added 0.6 percent and 0.2 percent respectively, though Aviva shed 1.9 percent.
Defensive stocks were broadly out of favour, with cigarette maker British American Tobacco off 0.2 percent and spirits group Diageo down 0.1 percent. (Editing by Greg Mahlich)