European stocks end firm

Gains in German banks helped push pan-European share indexes to their highest close since early March yesterday as Paris stocks shrugged off the expected rejection of a new EU Constitution.

The anticipated French "No" vote weighed on the euro, however, driving the common currency to a seven-month low against the dollar amid concerns about potential political instability and slowdowns in economic reforms.

By 1531 GMT, the FTSEurofirst 300 index of pan-European blue chips unofficially closed up 0.5 per cent at 1,106.3 points, its highest finishing level since March 7 and within a handful of points of a three-year high.

Volumes were extremely light at less than 500 million shares as markets in both Britain and the United States enjoyed a three-day weekend. The narrower DJ Euro Stoxx 50 index rose 0.4 per cent to 3,094.8 points. French stocks recovered from early losses after voters there resoundingly rejected the proposed Constitution, which many politicians said could be a knockout blow to the charter.

"The EU could be heading into a very serious political crisis here that could trigger significant event risk for the financial markets," said David Brown, chief European economist at Bear Stearns.

"The euro is going to be first in the firing line and we would not be surprised to see the euro knocked down to $1.20 in the coming weeks." As a hedge against further euro weakness, stock broker Execution suggested investors buy companies in Europe but outside the area of the common currency.

"The French vote on the referendum on Sunday and the Dutch vote (this week) have focussed markets on the risk inherent in the euro zone, meaning that anyone otherwise indifferent may prefer the Swiss, Swedish or UK exposure to the euro zone," Execution said in a note.

Paris's CAC-40 ended up 0.1 per cent, insulated from a larger reaction by weeks of opinion polls pointing to a "No" vote, while Zurich's SMI was flat. In the Netherlands, which faces its own EU constitution vote tomorrow, the AEX closed 0.4 per cent firmer.

Frankfurt's DAX closed 0.8 per cent firmer after hitting its highest level since July 2002.

German banking stocks led gains after Italy's Unicredito confirmed it was in talks to take over Germany's second-largest lender, HVB, boosting hopes of further merger-and-acquisition activity in the sector.

HVB rose 1.2 per cent, while Munich Re, which owns more than 18 per cent of HVB, added three per cent after saying it would not stand in the way of sensible merger ideas.

Fellow German firm Commerzbank jumped 3.9 per cent after the Wall Street Journal Europe reported it was being eyed as a takeover target by banks including Deutsche Bank, Royal Bank of Scotland, Societe Generale and BNP Paribas.

"The process of consolidation in Europe has started. It will take some time but there are plenty of opportunities," said a Dutch-based trader. Also firmer was Italy's Banca Intesa, which closed up 2.2 per cent after posting forecasting-beating earnings, announcing it had sold €9 billion in bad loans and agreeing a long-awaited tie-up of its asset management interests with those of France's Credit Agricole.