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Talks about a possible takeover by the world's sixth-largest drugmaker continued into the week despite earlier expectations that the two sides would hammer out a reconciliation at the weekend, following a testy courtship drawn out over months.

Shares in Sanofi rose at the opening of Paris trading, indicating investors remained confident a deal would go ahead.

"We should not over-interpret what's happening," said Justin Smith, analyst at UK brokerage MF Global. "In the end this is a complicated negotiation; it's a large transaction and they should take their time and be thoughtful about it."

Sanofi rose about 1 percent in early trading, outperforming a slightly firmer market. At 0840 GMT the French company's shares were up 0.9 percent at 50.73 euros.

Genzyme shares closed at $73.40 a share on Friday.

Buying Genzyme would add rare diseases as a new growth area for Sanofi, which under Chief Executive Chris Viehbacher has been diversifying to reduce exposure to cheaper generic drugs.

Until recently Cambridge, Massachusetts-based Genzyme -- founded in 1981 and one of the first entrants into the young biotechnology sector, which develops drugs from living cells -- had been unwilling to enter negotiations with Sanofi, which responded by launching a hostile $69-a-share bid in October.

Sources familiar with the situation said on Sunday that Sanofi could raise its cash offer to roughly $74 per share or $19.2 billion based on 258.99 million shares outstanding and add a fee tied to the performance of a drug Genzyme is developing.

The fee, called a "contingent value right," or CVR, would have an effective value of $5 to $6 a share.

The CVR would be a tradable security that offers a payout to shareholders over time and in this case would be based on the future performance of Lemtrada, designed to treat multiple sclerosis. If the drug fails, the option would be worth nothing.

Sanofi is due to report its annual results on Wednesday.

Buying Genzyme would be Viehbacher's biggest deal since he took office in December 2008 and Sanofi's biggest since it bought Aventis in 2004. That merger created a powerhouse with blockbusters such as anti-clotting drug Plavix, the world's second best-selling prescribed medicine. But with drugs losing patent protection, Sanofi is being forced to expand.

"It is not illogical that they should be able to reach an agreement around the price levels which are being indicated," said Jean-Jacques Le Fur, analyst at Oddo Securities.

"I have always estimated the transaction would happen between $69 and $75 a share in cash. The CVR should be worth $6 to $8 a share. The operation could be announced the day of Sanofi's results."

Nasdaq OMX Group said on Saturday that it found "suspicious files" on its U.S. computer servers, but said there was no evidence hackers had accessed or acquired customer information or that its trading platforms were compromised.

The news comes as flows into U.S. equity mutual funds show signs of recovering after years of outflows following the financial crisis and the debilitating experience of the "flash crash" last May that sent U.S. indexes plunging.

"There have been a number of events over the last few years that have damaged investor confidence and this could certainly be another one," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Just last week, an unexplained hour-long glitch locked the prices of two key indexes -- the widely followed Nasdaq Composite and the Nasdaq 100.

Given that about 21 percent of all U.S. cash equity trading was matched on one of Nasdaq OMX's exchanges last year -- second only to Big Board parent NYSE Euronext -- the integrity of its marketplace is closely aligned with the smooth functioning of U.S. markets in general.

The timing is poor as a stocks rally from last year has started to draw retail investors back into equities and away from bond funds.

The last three weeks of January saw back-to-back inflows into domestic equity mutual funds amounting to $10.3 billion, the longest streak of inflows in 1-1/2 years, according to data from the Investment Company Institute.

Individual traders also returned in force to U.S. equity markets in January, helping drive volumes to their highest levels since the "flash crash" last May.

Daily trading among retailers, including active "day traders" who drive much of the volume, jumped some 25 percent from December to January, Sandler O'Neill analyst Richard Repetto wrote in a note estimating market activity.

Although this event in itself is unlikely to have an impact on that trend, maintaining confidence is key at a time when regulators are concerned about the stability of the electronic marketplace and many retail investors believe the odds are against them.

"In general, investors have become increasingly concerned about some of the movements in the market ... and things like this just serve to undermine confidence," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Meckler said Nasdaq needed to release more information about the security breach.

"Just entering a system is a lot different from using a system to profit from it," he said. "That distinction is yet to be made."

Jim Awad, Managing Director at Zephyr Management New York, said investors were reserving judgment until Nasdaq released more information.

South Korea .KS11 and Japan .N225 led gains, with the former ending up below a record high and the latter closing at a nine-month peak.

Japan, which is the best performing Asian market this year with year-to-date gains of more than 3 percent, has benefited from a shift into developed markets and generally strong corporate earnings. The index closed up 0.5 percent.

South Korea has seen inflows from investors rotating out of last year's hot performing emerging markets in South and Southeast Asia due to relatively attractive valuations.

The broader MSCI index of Asian stocks outside Japan was up 0.4 percent to within striking distance of a three-year peak tested in January.

So far this year, Asian stocks have underperformed the MSCI world index by nearly three percentage points due to a variety of factors such as frothy valuations in some markets in South and Southeast Asia and strong data out of the U.S.

Investors pulled out $7 billion from emerging markets equity funds in the week of February 4, their biggest outflow in three years, data from fund tracker EPFR Global showed, putting a sizeable dent in record inflows seen in this category in 2010.

But indications that Asian authorities are demonstrating greater urgency to tackle inflation, with Indonesia being the latest country to increase interest rates by a quarter point last week, have made investors optimistic about the near-term outlook.

"Policymakers are likely to adopt more administrative measures and front-load rate hikes as inflationary expectations continue to rise," Barclays Capital strategists said in a note.

Most Asian markets which were closed for the Lunar New Year holiday late last week reopened on Monday with the exception of China, where trading will not resume until Wednesday.

DOLLAR DIPS

Boosted by Friday's data, which showed a sharp drop in the U.S. jobless rate, the dollar gained briefly against a basket of currencies. The dollar index .DXY, which tracks the greenback against a basket of major currencies, had dipped 0.2 percent by midday, nearing a three-month low of 76.881 tested last Wednesday.

The euro was up 0.2 percent at $1.3617 with traders citing talk of euro-buying by Asian names.

Reports of euro zone infighting over a French and German push for a comprehensive package of reforms to address the region's debt crisis also kept a lid on the euro.

Indeed, Credit Agricole said many of its Asian clients were skeptical about any signs of improved sentiment toward the eurozone's debt troubles.

The boards of both companies were scheduled to hold separate meetings on Sunday to discuss the status of a potential deal, but no final decision was likely to be made, said the sources, who declined to be named because the talks were not public.

French drugmaker Sanofi is still conducting due diligence on Genzyme's financial records and manufacturing operations, and discussions between the sides could linger into the week, sources said.

An agreement would come nearly nine months after Sanofi first put the idea to the U.S. biotech group.

Buying Genzyme will give Sanofi a new area for growth in the high-margin business of rare diseases as it seeks to make up for patent losses that will take out roughly a third of its 2008 sales base until 2013.

A deal is likely to be priced at roughly $74 per share in cash, or $19.2 billion, based on Genzyme's outstanding shares of 258.99 million as of October 29, plus a contingent value right, or CVR, with an intrinsic value of $5 to $6 a share, the sources said.

The CVR is a tradable instrument, which promises a payout to shareholders over time, based on the performance of Genzyme's experimental drug Lemtrada for multiple sclerosis. The drug is already sold under the brand name Campath for leukemia.

The nominal value of the CVR is expected to be between $12 and $15 a share, to be paid out over seven or eight years, assuming Lemtrada fulfills Genzyme's highest sales projections, according to one source.

That nominal CVR value is above what Wall Street had been expecting, said Mark Schoenebaum, an analyst at ISI Group.

"We suspect the market will deeply discount the vehicle," Schoenebaum said. "Our back-of-the-envelope calculations suggest that a $13.50 CVR that pays out over 7.5 years might trade at around $3 a share today. This assumes a 10 percent discount rate and 40 percent probability adjustment."

Since many Genzyme shareholders are short-term investors, the CVR could trade closer to $2 a share, according to one source. In that case, the deal would give Genzyme a tradable value of about $19.68 billion.

A BETTER DEAL

Sanofi Chief Executive Chris Viehbacher first told Genzyme CEO Henri Termeer he was interested in a deal on May 23 last year. He took an initial bid of $69 a share directly to Genzyme shareholders in October. But the two companies have entered direct negotiations on a higher price in recent weeks.

"A $74 cash deal makes financial and strategic sense for Sanofi. It removes a substantial overhang and gives a bridge over the patent cliff they face," said Marc Booty, a fund manager at Pictet.

Genzyme's stock traded at about $50 as recently as July, 2010. The stock closed Friday at $73.40.

Nasdaq OMX Group said on Saturday that it found "suspicious files" on its U.S. computer servers, but said there was no evidence hackers had accessed or acquired customer information or that its trading platforms were compromised.

The news comes as flows into U.S. equity mutual funds show signs of recovering after years of outflows following the financial crisis and the debilitating experience of the "flash crash" last May that sent U.S. indexes plunging.

"There have been a number of events over the last few years that have damaged investor confidence and this could certainly be another one," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Just last week, an unexplained hour-long glitch locked the prices of two key indexes -- the widely followed Nasdaq Composite and the Nasdaq 100.

Given that about 21 percent of all U.S. cash equity trading was matched on one of Nasdaq OMX's exchanges last year -- second only to Big Board parent NYSE Euronext -- the integrity of its marketplace is closely aligned with the smooth functioning of U.S. markets in general.

The timing is poor as a stocks rally from last year has started to draw retail investors back into equities and away from bond funds.

The last three weeks of January saw back-to-back inflows into domestic equity mutual funds amounting to $10.3 billion, the longest streak of inflows in 1-1/2 years, according to data from the Investment Company Institute.

Individual traders also returned in force to U.S. equity markets in January, helping drive volumes to their highest levels since the "flash crash" last May.

Daily trading among retailers, including active "day traders" who drive much of the volume, jumped some 25 percent from December to January, Sandler O'Neill analyst Richard Repetto wrote in a note estimating market activity.

Although this event in itself is unlikely to have an impact on that trend, maintaining confidence is key at a time when regulators are concerned about the stability of the electronic marketplace and many retail investors believe the odds are against them.

"In general, investors have become increasingly concerned about some of the movements in the market ... and things like this just serve to undermine confidence," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Meckler said Nasdaq needed to release more information about the security breach.

"Just entering a system is a lot different from using a system to profit from it," he said. "That distinction is yet to be made."

Jim Awad, Managing Director at Zephyr Management New York, said investors were reserving judgment until Nasdaq released more information.