Shares in Diageo fell 1.6 from an all time high of 1,887 pence hit yesterday as the firm ended negotiations that had widely been expected to result in a deal to buy a stake in the world's number 1 tequila brand.
"The news of the (Cuervo) acquisition not working out could be the catalyst for Diageo to come down to more realistic levels," Manoj Ladwa, head of trading at TJ Markets, said.
Ladwa said he would wait for the shares to come down to 1,500 pence, a level last hit in June, before buying into the stock, but he cautioned that demand from fund managers was likely to come in even before that level in light of the stock's reliable business model and dividend yield.
Diageo traded at 18.1 times its expected earnings for the next 12 months and offered a 2.5pc dividend yield, broadly in line with the broader STOXX 600 food & beverages index, trading at a 18.3 multiple and 2.7pc yield, Thomson Reuters data showed.
For the broader market, however, Diageo's share loss knocked three points off the FTSE 100, which was up just 0.05pc.
Whitbread was up 4.5pc to the top of the UK blue-chip index as Britain's biggest hotel and coffee shop operator posted a rise in third quarter sales, helped by rising demand for its expanding Costa brand.
The FTSE 100 reached its highest closing level in nearly nine months on Monday and is now capped by technical resistance at 5,930, an intra-day high hit in September.
UK banks were down 0.3 percent, weighed down by concerns that the euro zone debt crisis may flare up again in Italy.
Italian yields crept higher on Tuesday and stocks in Milan extended losses, adding to the move seen in the previous session triggered by technocrat Prime Minister Mario Monti's decision to resign early, which has shaken faith in Italy's reform agenda.
"If you saw the government in Italy and Spain really back away from the commitments that they have made in the last twelve months, that would be taken badly," Chris Wyllie, chief investment officer at Iveagh, said.