European stock markets closed at a four-and-a-half-year high yesterday, extending recent gains, as a rise in auto and technology issues boosted markets, while HSBC rose on an upgrade by Citigroup.

Telecoms equipment maker Ericsson jumped 3.3 per cent, with dealers saying the stock was probably benefiting from Swedish pension fund buying.

"The market is expecting annual state pension funds released from government budgets to enter the market today. Ericsson is a key constituent of the market," said one trader.

By 1640 GMT, the pan-European FTSEurofirst index of 300 shares was up 0.3 per cent at a provisional close of 1,309.5 points, its strongest level since early August 2001.

The index has risen about 2.5 per cent this year, building on last year's rally of nearly 23 per cent, with hopes that US interest rates were near a peak, helping boost equities.

Among gainers, medical devices maker Synthes gained four per cent after it received an earlier-than-expected green light from regulators to market its ProDisc replacement spinal disk in the US.

HSBC added 2.4 per cent after Citigroup upgraded its rating on the global banking group to "hold" from "sell", arguing the stock's long period of underperformance was over. The DJ Euro Stoxx 50 gained 0.2 per cent to 3,673.8. Strategists said robust earnings supported stocks.

"The markets are heading higher, and it's probably inappropriate to be too cautious on equities," said Mike Lenhoff, chief strategist at private client firm Brewin Dolphin. "The valuations for Europe are still quite attractive."

"Given the improving global backdrop, earnings for Europe will continue to be quite good," said Mr Lenhoff.

Strategists at Deutsche Bank said equities had further to run, helped by signs of an end to US interest rate increases, but added that rising oil and commodities prices should be closely watched.