European stocks end higher as oil eases

European shares rebounded yesterday as oil prices eased on news Hurricane Rita lost some intensity, while strong drug stocks such as GlaxoSmithKline and rife takeover talk in Spain also lifted the market.

Union Fenosa was among the biggest gainers on Spain's IBEX blue-chip index, rising 3.3 per cent as news bank Santander had sold its 22 per cent stake in the power firm revived talk it could be a takeover target.

Spanish oil company Repsol set fresh record highs meanwhile on continuing speculation that industry giant BP would bid for it. The IBEX ended 0.9 per cent higher.

Yet uncertainty over the potential damage Hurricane Rita could inflict on the US oil industry, and indirectly on the world's biggest economy, kept investors nervous.

The FTSEurofirst 300 index of pan-European blue chips ended up 0.5 per cent at 1,207.4 points - finishing the week around 0.5 per cent lower than it started. The narrower DJ Euro STOXX 50 index added 0.6 per cent to 3,331.6. Rita, now a Category 4 hurricane but still equivalent in ferocity to Hurricane Katrina, was due to make landfall overnight, and widely expected to set the mood on financial markets next week.

Some market observers said any significant damage could prompt market to discount higher prospects of economic slowdown.

"Rita's approach nabs the market's attention, taking precedence over all other news in the market," said Valerie Plagnol, chief economist at French broker CM-CIC Securities."As we were still in the process of assessing Katrina's impact on the economy, Hurricane Rita appears, stirring new worries of oil supply shortage in the United States." For now, oil prices slipped below $65 a barrel as investors hoped Texas refineries would escape Rita's devastation. Reflecting the dip in the oil price and also fears of damage to its facilities in the US Gulf, BP fell 0.9 per cent.

Meanwhile, insurance stocks such as Munich Re rebounded from Thursday's sharp losses. Merrill Lynch analysts estimated that the hurricane's impact on the industry would have to be more severe than $10 billion to prompt any firms to seek to increase capital.

Around Europe, London's FTSE 100 index gained 0.5 per cent, while Paris's CAC 40 and Frankfurt's DAX each added 0.7 per cent.

The German blue-chip index ended the week two per cent lower after Sunday's inconclusive elections and as political parties continued their negotiations to try to form a government.

In London, GlaxoSmithKline rallied 2.8 per cent on growing hopes for its development pipeline of new drugs. Swiss rival Novartis gained 2.3 per cent to 64.15 Swiss francs after Deutsche Bank raised its price target to 67 Swiss francs from 64, citing growing hopes for its hypertension business.

Volkswagen was another strong spot, up 3.4 per cent to a fresh three-year high after Europe's biggest carmaker said it will review strategic options for its wholly owned car-rental business and its IT services unit.

VW shares have risen more than 17 per cent this week and breached €50 for the first time in three years on Thursday in huge volume as rumours swirled that a major strategic investor may be building a stake.

On the downside, TNT fell 5.3 per cent as the Dutch mail and logistics firm said it was investigating tax irregularities at unnamed subsidiaries that may have an impact on its results.