Energy and mining stocks helped European shares end slightly higher yesterday, with Italian blue chips outpacing the rest of Europe after exit polls indicated a clear victory by centre-left opposition leader Romano Prodi in general elections.
Fresh merger talks lifted Italian banking stocks such as Capitalia amid wider speculation that a centre-left government would pave the way for more consolidation in the fragmented sector.
Takeover news also underpinned Britain's Compass, which gained four per cent after agreeing to sell its travel concession business, but Switzerland's Serono plunged 8.4 per cent after calling off a search for a buyer and launching a quest for acquisitions instead.
The pan-European FTSEurofirst index of 300 leading shares ended 0.54 per cent higher at 1,383.11 points.
The Italian election upstaged a relatively quiet corporate news front.
Exit polls showing that Mr Prodi was set to secure a majority in both houses of Parliament eased worries of political instability, but observers said the impact on Italian shares could be short-lived as many uncertainties still lay ahead.
"The centre-left's coming out ahead in both houses (has eliminated) fears of a stalemate, which would have led to an inability to govern," said one dealer in Milan.
Italian blue chip index MIB 30 ended 1.3 per cent higher, while elsewhere in Europe, London's FTSE 100 index gained 0.7 per cent higher and Frankfurt's DAX added 0.9 per cent.
European equity strategists such as Adrian Darley at Gartmore Investment Management in London said further signs of earnings strength and merger and acquisitions activity could help European equities gain another 10 per cent by year-end.
He also dismissed worries that interest rate rises in the euro zone could cap investors' enthusiasm for equities.
"Interest rates have been going up in the US for two years and it hasn't stopped the stock market going up. The reason why interest rates are going up is that growth has been much stronger than expected... and this is not negative," he said.