Shares in the water firm rose by as much as 19 per cent in early trading before settling to close almost 14 per cent higher, adding 54 points to the blue-chip market and dragging up peers United Utilities and South West Water owner Pennon.
Severn Trent last night said it had rejected the initial bid approach, adding that the undisclosed offer price undervalues the firm.
The FTSE 100, the index of Britain’s biggest companies, closed up 0.8 per cent at 6,686 points, its highest level since before the financial crisis, pointing to renewed confidence in mergers and acquisition activity.
Record highs were also recorded in New York, with the S&P 500 rising to an all-time intraday high of 1,651.10, before closing down slightly at 1,650.34.
The US index has risen 16 per cent so far this year, helped by central bank monetary policy and strong sentiment around merger and acquisition dealmaking.
Listed utility companies have long been takeover targets for institutional investors in the UK.
Veolia Environment sold its UK water firm for £1.2bn in June and last year Northumbrian Water was taken over by Cheung Kong Infrastructure for £2.4bn.
The consortium of bidders for Severn Trent includes the UK’s second biggest pension scheme, the Universities Superannuation Scheme and a Canadian fund.