Eurostocks hold Nestle-led gains, index changes loom

European shares largely held their gains in late trade yesterday, with Nestle leading the way, after the Dow shook off its early jitters and also rose, boosted by encouraging economic data.

France Telecom was among the leading fallers amid fresh uncertainty over its strained relationship with German partner Mobilcom.

But also weak were Zurich Financial and Alcatel ahead of expected changes to benchmark indices.

At 1601 GMT, with only Frankfurt officially trading, the FTSE Eurotop 300 was one per cent up at 955 points, having momentarily slipped at mid-session as Wall Street headed for a poor open.

That changed after the Chicago Purchasing Managers Index came in at a better-than-expected 54.9 in August, from 51.5 in July, signalling that manufacturing activity was picking up in a key region of the world's biggest economy after recent data had suggested otherwise.

"The market likes that because the Chicago PMI is a lead indicator for the ISM on Tuesday and it is pointing back to growth rather than a pathetic recovery or, even, double-dip recession," said David Thwaites, pan-European strategist at BNP Paribas.

The Institute of Supply Management (ISM) survey due next Tuesday has been threatening to slip below the 50 mark, at which point the US manufacturing sector would be deemed to be contracting.

But Thwaites warned that the market's positive reaction was probably magnified by poor volumes as investors closed out positions ahead of the US Labor Holiday on Monday.

The FTSE Eurotop 300 index has lost around four per cent this week, battered by weak business confidence in Germany and deteriorating consumer confidence in the United States.

The narrower DJ Euro Stoxx 50 index jumped 1.4 per cent at 2,708 points.

Nestle led the climbers with a gain of 4.7 per cent after reports said the world's No.1 food firm had made a possible bid for US chocolate maker Hershey Foods more appetising for Nestle shareholders by promising not to pay $12 billion for the firm, as some analysts suggested it might.

Shares in France Telecom shed 7.3 per cent after the French firm delayed a board meeting to decide the fate of MobilCom, sparking fresh uncertainty over how the two will resolve a sticky row.

That, together with an earnings warning from US peer BellSouth, weighed on other telecom shares, such as Britain's BT , which lost 0.6 per cent.

Vivendi Universal rose 1.6 per cent after the media giant kicked off its debt-busting asset sales programme by selling its Internet portal and Express magazine in deals worth 440 million euros.

The Financial Times also reported that US private equity groups Blackstone and Thomas H. Lee, had emerged as lead bidders in the $1.5-$2 billion auction of Houghton Mifflin, the US publishing arm of Vivendi.

Shares in Euronext jumped nine per cent in Paris after the pan-European stock exchange posted a 61 per cent rise in half-year net profit that was much better than expected.

Elsewhere, shares in German chemicals group BASF rose three per cent amid speculation the stock will be included in the Dow Jones Stoxx 50 index.

Among the other promotion candidates being tipped by investment bank Dresdner Kleinwort Wasserstein was UK supermarket chain Tesco, up 1.6 per cent, Benelux bancassurer Fortis, up 4.3 per cent, and British bank HBOS, up 0.4 per cent.

Index compiler Stoxx Ltd is due to reshuffle its blue chip indices on Monday with any changes likely to come into effect after the market closes on September 20.

French telecom equipment maker Alcatel and Swiss insurer Zurich Financial, which are set to be kicked out of the Stoxx 50, lost 5.71 per cent and 2.45 per cent respectively.

Some traders also put Zurich Financial's losses down to jitters ahead of its first-half results next Thursday.

In New York, the Dow Jones industrial average reversed initial losses and added 0.5 per cent.

But the tech-heavy Nasdaq Composite fell 0.9 per cent, buffeted by dour overnight outlooks from tech bellwethers Sun Microsystems and Novellus Systems.

Investors were given a mixed picture of the US economy ahead of the Chicago PMI, after data showed US personal spending posted its biggest monthly rise since October in July but showed US income growth was flat.

Meanwhile, the University of Michigan's final August consumer sentiment index fell slightly to 87.6, against expectations of a rise to 88.3.