European shares closed at their highest level in nearly two weeks yesterday after the European Central Bank (ECB) eased investors' fears about interest rates rising too far and too fast, and takeover talk boosted the tobacco and financial stocks.

Gallaher shares surged 21.6 per cent after receiving a bid approach, which sources close to the situation said came from Japan Tobacco. This helped offset weak mining stocks as concerns about waning US demand hit copper prices.

The FTSEurofirst 300 index of top European shares added 0.5 per cent to 1,447.86, ending higher for the fourth consecutive day, and marking its highest close since November 24. The narrower DJ Euro Stoxx 50 index rose 0.4 per cent to 4,018.69 points.

The European Central Bank lifted rates to a five-year high and left the door open for further monetary tightening next year, which many investors had been expecting.

But European stock indexes accelerated gains shortly after ECB President Jean-Claude Trichet said investors would be wrong to bet on a new rate rise as soon as February.

And a downward revision in the bank's forecast inflation to two per cent in 2007 and 1.9 per cent in 2008, helped paint a slightly more dovish picture than many investors had expected although strategists said the overall tone remained hawkish.

"The ECB staff forecast projections are encouraging in that stronger growth and easier inflation is expected over the future... ECB expectations of inflation below two per cent in two years' time may be latched on to by the optimists that the ECB will not overreact on rates," said economist David Brown at Bear Stearns.

Yesterday's market gains took place in relatively low volumes as many investors stayed on the sidelines ahead of today's crucial US non-farm payrolls report, which they hope will give clues on the scope of a US economic slowdown.