* FTSE 100 up 0.2 pct, but down 2.6 pct this week
* Imperial leads gainers; in talks to buy assets
* M&A activity also lifts Friends Life, Unilever
By Tricia Wright
LONDON, July 11 (Reuters) - UK shares edged higher on Friday as merger activity helped cigarette makers advance, although the FTSE 100 index was still on course to record a drop of close to 3 percent this week.
Imperial Tobacco led the gainers, up 3.5 percent, after saying it was in talks with Reynolds and Lorillard to acquire certain assets and brands the two companies may sell. Reynolds and Lorillard are in talks about a deal that would merge the No. 2 and No. 3 U.S. cigarette makers, Reuters has previously reported.
British American Tobacco, which owns 42 percent of Reynolds, advanced 1 percent.
Tobacco stocks reaped the benefit not only of the deal-making activity, but of a move towards safe-haven stocks sparked by a reminder this week of the frailness of euro zone banks.
"You've got the fact that tobacco shares seem to be the go-to place when markets are a little bit nervous and a little bit volatile, and then you've got the M&A story on top of that," CMC Markets senior analyst Michael Hewson said. "Imperial Tobacco's obviously buying assets from the merged group so it's a story for both (Imperial Tobacco and BAT)."
Signs of deal activity elsewhere in the market also helped stabilise the index. Insurer Friends Life Group, which announced the disposal of its Lombard unit to Blackstone Group , advanced 0.9 percent, and consumer-goods maker Unilever rose 0.4 percent after selling its Slim-Fast brand to Kainos Capital.
The FTSE 100 was up 14.21 points, or 0.2 percent, at 6,686.58 points by 0812 GMT. The move only shaved its losses this week to 2.6 percent, though, leaving it on course to record its worst week since mid-March.
Investors remained cautious on Friday as Portugal's biggest bank attempted to reassure investors after trading in its shares was suspended. Concerns over financial services has hit shares as far away as the United States and Japan, and events in Portugal made investors nervous across Europe.
The latest market retreat, which saw the FTSE 100 sink 0.7 percent on Thursday, came after shares and bonds of Espirito Santo Financial Group, the chief shareholder in Banco Espirito Santo, were suspended over "material difficulties" at parent firm ESI.
"The market is very confused at the moment with people not sure about the strength of the economic recovery and worries about structural issues that have not been resolved. A trading range seems the most likely outcome," Lex Van Dam, a hedge fund manager at Hampstead Capital, said. (Reporting by Tricia Wright; Editing by Larry King)