European shares closed up more than half a per cent yesterday, buoyed by further gains on Wall Street and a sharp fall in oil prices after data showed a surprising increase in US oil supplies.

Heavyweight banks like HSBC and Royal Bank of Scotland led the way higher, while telecom companies were also strong as investors sought big blue-chip stocks.

Dutch telecoms group KPN rose 3.1 per cent after saying it would resume its share buyback programme.

The FTSEurofirst 300 index of pan-European blue chips was closed 0.6 per cent firmer at 1,041.5 points, having risen to within a point of last week's peak of 1,044 points.

The narrower DJ Euro Stoxx 50 index rose 0.9 per cent to 2,937.7 points.

Markets are expected to extend the current seasonal rally into the New Year, but opinion is divided over whether investors should chose a defensive, stable portfolio or favour a more growth-orientated strategy.

"We like stocks with exposure to Asian and US markets, because that's where we expect the growth to be," said Daniel Birch, a strategist at independent brokers Execution.

"We like the Philipses and Siemenses of the world, companies making intermediate products... and we still like miners because we expect China growth to remain strong."

However, Merrill Lynch recommended investors pursue high-quality and defensive stock strategies, along with seeking growth at reasonable prices.

"We believe these strategies will reward investors in an environment where global growth and profit expectations are forecast to slow," Merrill strategist Khuram Chaudhry said.

In New York, the blue-chip Dow Jones industrial average was 0.4 per cent higher at 10,8064.7 points, a fresh 3-1/2 year high, while the Nasdaq Composite Index rose 0.3 per cent to 2,157.8 points by 1716 GMT.