European shares gain 4.2%, ending volatile week

European shares gained 4.2 per cent yesterday, ending a volatile week on a strong note thanks to energy stocks which tracked a recovery in crude, while drug makers rose before key company reports next week.

The FTSEurofirst 300 index of top European shares ended at 894.77 points, close to the day's high of 899.08 points.

The index gained 6.3 per cent on the week, but has lost 40 per cent this year on worries a recession will affect the prospects of companies across the board and add to the effects of banking failures.

Oil groups BP, Total and Royal Dutch Shell climbed around nine per cent, having suffered big declines on Thursday. Italy's ENI rose 14.5 per cent. The sector tracked a recovery in crude prices, which rose 1.9 per cent to more than $71 a barrel, amid growing expectations of an Opec production cut.

Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC 40 posted gains of 3.4 to 5.2 per cent. The rise in European shares only clawed back some of the ground lost in the previous two days, when the leading index fell 6.5 per cent and five per cent. But some market participants said there were signs the worst could be over.

"What helps is that we've ended the week in the same way it started, on an upbeat note," said Mike Lenhoff, chief strategist at Brewin Dolphin.

"I somehow felt that although this week was marked by just as much volatility as last week, it had a different feel. There was encouragement from the steps the governments have been taking (to deal with the banking crisis)," Mr Lenhoff said.

Defensive drug stocks also rose. Roche and Novartis, which report sales figures and results for the third quarter next week, gained more than 10 per cent. UK companies AstraZeneca and GlaxoSmithKline rose 5.2 and 8.6 per cent respectively.

US stocks were marginally lower around the time European bourses were closing, after a report showed housing starts slid in September, heightening recession fears.

Construction starts on new US homes fell to a 17.5-year low in September as builders scaled back amid a worsening housing slump.

Further, the Reuters/University of Michigan Surveys of Consumers showed confidence plummeting in October, with the preliminary consumer sentiment index falling to 57.5 from September's final reading of 70.3. Economists in a Reuters survey had expected a preliminary October reading of 65.5.

The Dow Jones Industrials, S&P 500 and Nasdaq Composite indices were down between 0.5 and 0.9 per cent.

Europe's banking sector was mixed. Dutch financial services group ING slumped 27 per cent, following a report in Dutch business daily Het Financieele Dagblad citing analysts saying the company was under increasing pressure to strengthen its capital. The company declined to comment.

France's BNP Paribas reversed earlier losses to close up 1.7 per cent.

Insurers were mostly lower, notably Aviva and Prudential in the UK, off 12.7 and 9.3 per cent respectively.

Handset makers Ericsson and Nokia were strong, rising five and 10.6 per cent respectively. Nokia had posted a fall in third-quarter earnings on Thursday but sounded a reassuring note about cellphone volumes for the full year.

Shares in auto group Daimler jumped 9.2 per cent after a source familiar with the talks said private equity group Cerberus was in talks to buy Daimler's remaining stake in Chrysler. Daimler declined to comment.