Eurostocks firm as cars rally

European blue-chips edged to a firmer close yesterday, led by a rally in car stocks such as Volkswagen and fired by tobacco firm Gallaher on takeover speculation.

Italy's biggest insurer Generali gained more than three per cent on stake-building ahead of the firm's annual meeting in April.

But overall sentiment remained edgy as the spectre of a US-led war against Iraq drew closer.

"The longer the uncertainty about Iraq drags on, the more nervous the market will be and the longer it will continue to trend down," said Florian van Laar, an asset manager at Eureffect in Amsterdam.

The United States said it had now massed enough troops in the Gulf to attack Iraq, as Turkey appeared prepared to allow its territory to be used to launch part of the expected assault.

Europe's financial markets were jolted during the afternoon session by news of a propane barge explosion off New York's Staten Island. Traders said investors initially reacted to the blast as though it was an attack rather than an apparent accident.

"The market is as nervous as hell and its reaction to the barge fire in the US is a good example of just how jittery it is," said Van Laar.

Oil stocks such as BP and Total drew strength from a steep rise in crude oil prices in the wake of the explosion. Near-month crude oil futures were trading up two per cent at around $32.20.

By 1645 GMT, with only Frankfurt still trading, the FTSE Eurotop 300 index was up 0.9 per cent at 786.5, leaving it up about six points on the week.

The narrower DJ Euro Stoxx 50 index rose 1.4 per cent to 2,204 points.

On Wall Street, the Dow Jones industrial average was up 0.9 per cent, while the Nasdaq Composite rose 0.4 per cent.

Tobacco stocks were fired up after an unsourced report in BusinessWeek magazine reignited rumours that British American Tobacco might bid for rival Gallaher.

Both companies declined to comment. Gallaher gained 6.4 per cent, while shares in BAT rose 2.74 per cent.

Insurer Generali rose 4.5 per cent as banks increased their stakes in the group in order to have a bigger say at the firm's shareholder meeting in April, although analysts warned the share price advance was not backed by fundamentals.

Among oil stocks, BP jumped 3.3 per cent, Total added 2.7 per cent and Italian oil giant ENI firmed 2.8 per cent, leaving the DJ Stoxx Energy index up 2.3 per cent - the biggest sectoral gainer.

On the downside, Dutch insurer ING Groep slipped 1.8 per cent as investors looked past a solid set of 2002 results to the company's lack of guidance for 2003, blaming uncertainty over the economy and Iraq.

"The ING figures weren't all that bad, but the stock has fallen because the markets are nervous. It is better to have bad figures in a good market climate than good figures in a bad market climate," said Van Laar.

Investors will be looking to developments on two fronts over the coming days to help lift market uncertainty. At the weekend, finance ministers from the world's wealthiest countries gather in Paris to discuss what can be done to fend off recession.

Weak US economic data on Thursday was followed yesterday by news that the French economy grew last year at its weakest rate since 1996.

Yesterday, it was revealed the US Consumer Price Index, the main US inflation gauge, rose a tame 0.3 per cent in January, as expected.

Next week, the United States will seek UN approval for a possible war against Iraq, after saying on Thursday it had amassed a big enough force in the Gulf to attack Iraq at any time.

"The flack has not started to fly in Iraq yet, but there's plenty of danger out there for global stock markets and the dollar," said David Brown, chief European economist at Bear Stearns.

"If the geopolitical flak does not get you, the economic flak almost certainly will. That's why it is better to stay holed up in the safety of government bond markets."