M&A flurry sends European stocks to near six-year high

European shares bounced yesterday to their highest level in almost six years with construction stocks leading the gains as merger talk ripped through the sector while oil and automakers added to the upbeat tone.

Among major gainers, Corus jumped on a report India's Tata Steel could raise its takeover bid, while DaimlerChrysler climbed after an analyst report suggested it could spin off its loss-making Chrysler unit.

"Stock markets remain attractive in relation to other asset classes such as bonds," said Aberdeen Investment Management.

"Sentiment however is a major factor, and should inflation refuse to subside then equity markets may stumble. Certainly in the short term market momentum is stretched."

The pan-European FTSEurofirst 300 index ended up 0.7 per cent at 1,519.8, its highest close since February 2001.

European stocks extended gains after the preliminary January reading on sentiment by the Reuters/University of Michigan Surveys of Consumers showed US consumer sentiment improved more than expected to a three-year high this month.

The benchmark European index closed up 0.6 per cent for the week during which lacklustre oil and base metal prices capped gains and stronger-than-expected US economic data sparked warnings by Federal Reserve officials on inflation.

"Stocks are vulnerable to renewed worries of an increase in US interest rates," said Kevin Gardiner, a strategist at HSBC.

"In the short term, that is the risk number one. But... we go into this with valuations relatively undemanding, the level of corporate profitability is at a very high level and it could be a typical three steps forward, two steps back-type progress for the market."

Construction stocks ranked among yesterday's top gainers, with Vinci adding 6.4 per cent on bid speculation as the holding company of French billionaire François Pinault bought a 5.1 per cent stake in the group.