The financial sector yesterday fuelled a rally in European shares, which scored their third weekly gain, after US jobs data suggested the world's largest economy was proving more resilient than expected.

Banks and other interest-rate sensitive stocks such as insurers were among the largest positive influences on the European market, after the US April jobs report showed a smaller contraction than expected in the labour market and a measure of manufacturing activity beat forecasts.

Spain's Banco Santander rose four per cent, making it the top individual positive weight on the market, while Telefonica rose 3.3 per cent as Spanish stocks with big exposure to Brazil got a boost from news that Standard & Poor's raised its rating on that country to investment grade.

Other banks on the move included Royal Bank of Scotland, UBS and BNP Paribas, which rose between three and 5.6 per cent.

Auto stocks and other exporters such as luxury goods manufacturers got a boost from a drop in the euro, which fell against the dollar following the US data, while other industrials were supported by a fall in the price of crude oil.

The FTSEurofirst 300 index of top European shares rose 1.67 per cent to 1,361.36 points, bringing the gain for this week to 2.6 per cent, the third weekly rally in a row.

"(Payrolls) makes you think, along with the ISM data earlier this week, that perhaps life is not getting worse. It may not be brilliant, and housing market data from CaseShiller was pretty grim, but the second half of the week has given an indication that things are not getting worse," said Philip Isherwood, a strategist at Dresdner Kleinwort.

"The equities market looks forward and you can build a plausible optimism on that."

The FTSEurofirst index rose six per cent last month to record its best monthly performance since late 2003 as corporate results came in better than investors feared.

The index is still down 10 per cent on the year, however, weighed down by the fallout from the global credit crisis and the extent of its impact on the US economy in particular.

Beyond the banks yesterday, French insurer Axa was up 3.9 per cent, while Germany's Allianz was up two per cent and Swiss Re 1.7 per cent. In London, Old Mutual gained 5.2 per cent and Aviva 4.5 per cent.

The euro fell to around one-month lows against the dollar, helping support the auto sector where French carmaker Renault gained 6.2 per cent and Peugeot rose 3.2 per cent after data showed strong French car sales for the company in April and after Nissan, in which Renault has a significant stake, reported resilient US April sales.

Germany's BMW gained 3.9 per cent, while Daimler rose 0.8 per cent.

The broad-based rise in the dollar kept crude oil below $115 a barrel, yet BP, Royal Dutch Shell and Total rose between 0.3 and 1.1 per cent as ongoing support from BP's and Shell's results this week buoyed the sector.

Airline stocks rallied, thanks to softer oil prices and British Airways, which said late on Wednesday that it was in talks with two US carriers over a potential alliance.

Air France-KLM added 4.7 per cent, Lufthansa gained 3.7 per cent, while British Airways rose 2.4 per cent, adding to the previous session's 7.3 per cent rise. Budget airlines Ryanair and easyJet gained 5.7 and 4.6 per cent respectively.

Ericsson dropped 4.8 per cent, losing some of its post-earnings lustre as investors focused on how much the telecom equipment maker has reaped from intellectual property rights (IPR) sales. Lehman Brothers, which issued a note yesterday about the impact of IPR sales, said a little more than three percentage points of Ericsson's first-quarter gross margins came from parent company financials rather than underlying operations. Stripping that out, the margins declined in the quarter, Lehman said. Nokia lost 1.4 per cent.

Mining shares gained ground, with up 4.6 per cent after an Australian newspaper cited Rio Chairman Paul Skinner as saying a break-up of his company was an option to extract the best return for shareholders.

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