* FTSE 100 index closes flat after early losses
* SABMiller gains on fresh merger talks
* BT falls on Sky's plan to launch new sports channel
By Atul Prakash
LONDON, June 10 (Reuters) - Britain's top stock index recovered in late trading on Tuesday to end flat, with a surge in SABMiller on merger talks offset by a drop in BT Group shares following news of rising competition in the sector.
SABMiller, up 5.6 percent, added the most points to the blue-chip FTSE 100 index, with traders citing fresh talks about the merger of the brewer with a major European beer company.
"Companies have got a lot of money and are looking at places to spend. SABMiller is just as likely a candidate as anyone else. I think it's more chatter than substance at this moment," Michael Hewson, chief market analyst at CMC Markets, said.
"Overall, investors are a little bit nervous about buying equities at current levels because valuations are a little bit high."
The benchmark FTSE 100 index closed flat at 6,873.55 points after falling as low as 6,835.80 points earlier in the session. The index is less than 2 percent off its all-time high set in December 1999.
Gains in companies like SABMiller were offset by falls in firms such as BT Group, which dropped 2.4 percent to the bottom of the FTSE 100 index after news that Britain's largest pay-TV company BSkyB will launch a television channel dedicated to European football.
Customers with Sky Sports will be able to receive the new channel, Sky Sports 5, as part of their sports package at no extra cost and get two years' free broadband connection, Sky Sports said on its website.
"It's bad for BT, in terms of potential erosion of current rate of customer acquisition, which had been benefiting from free sports with broadband," said Mike van Dulken, head of research at Accendo Markets.
"With Sky now countering this with a free broadband for existing customers, BT may see less Sky customers jumping ship in the 2014/15 season before it begins broadcasting the all-important Champions League in 2015/16."
Despite a cautious approach by investors to push the markets higher in the near term, analysts remained positive on the stock market's outlook going forward.
"We have seen a very strong performance over the course of the past few months and it is understandable that investors are nervous in the short term as valuations are no longer cheap as they used to be and U.S. stimulus is gradually being withdrawn," said Henk Potts, equity strategist at Barclays Wealth.
"But the market's outlook remains positive in the medium- to longer-term term. Earnings growth still remains very strong and that should be supportive for valuations. We believe in the strength and speed of the economic recovery." (Additional reporting by Alistair Smout; Editing by Mark Heinrich)