European shares ended more than two per cent higher yesterday as banks enjoyed their best day in four months ahead of a vote on a US housing market rescue Bill, while autos gained on strong earnings and oil fell.

The FTSEurofirst 300 index of top European shares closed 2.06 per cent higher at 1,188.99 points, after rising as much as 2.3 per cent earlier in the session.

Banks, which are still down 30 per cent since the start of the year, recorded their biggest one-day gain since mid-March with the DJStoxx European banking index soaring 6.2 per cent. HBOS rallied 16.8 per cent amid trader talk that Spain's BBVA had cast an acquisitive eye on the British lender. Both banks declined to comment.

Other big advancers included Barclays, up 11.8 per cent, Credit Agricole, up 7.4 per cent, and Credit Suisse, up 7.1 per cent.

"Anything that supports the mortgage market is encouraging," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe, adding that further support was needed for commercial banks.