European shares near two-week highs

European shares posted their strongest close in about two weeks, helped by a rally in utility stocks such as Scottish Power on takeover speculation.

Scottish Power rose four per cent, with gains stoked by a weekend newspaper report that German utility E.ON had hired an investment bank to advise on a potential bid for the firm.

Spanish utility Endesa also rallied nearly three per cent after a source familiar with the situation said Gas Natural will attempt a takeover of Spain's leading utility. Shares in Endesa and Gas Natural were suspended in the session.

By 1550 GMT, the pan-European FTSEurofirst index of 300 blue chips was 0.6 per cent higher at a provisional close of 1,190.7 points, just below the 1,194.4 points struck on August 22.

Trading was light with the Labor Day holiday in the US limiting market participation.

European stock markets have outperformed other regions on stronger-than-expected earnings growth as companies benefit from robust demand, low interest rates and aggressive cost cuts.

Rene Clerix, head of European equities at Dexia Asset Management, said he was positive on equities but added that gains might be capped by possible disappointment in European earnings in the third and fourth quarter when faced with tough comparisons from strong year-ago performances.

"We are cautiously optimistic." Around Europe, London's FTSE 100 index was 0.2 per cent higher and Paris's CAC 40 put on 0.6 per cent.

Frankfurt's DAX added 1.5 per cent, supported by strength in auto shares as Volkwsagen rallied three per cent after announcing job cuts and as data showed German car registrations rose for the fifth consecutive month last month.

Investors elsewhere remained cautious as they tried to assess the impact of hurricane Katrina on the world's biggest economy.

The scale of the destruction caused by Katrina has already led some economists to trim their US growth forecasts and markets are growing more confident that US interest rate rises are coming to an end.