European shares close up 3.8% as oils, banks rally

European stocks rose yesterday, rallying for a second session as oil shares surged, while banks gained on signs of thawing in interbank lending and the possibility of a second US stimulus package.

The FTSEurofirst 300 index of top European shares ended up 3.8 per cent at 928.29 points, the day's high. The index gained 4.2 per cent on Friday, but has lost more than 38 per cent so far this year in a credit crisis that has brought the global economy to the brink of recession.

Britain's FTSE 100 index rose 5.4 per cent, Germany's DAX rose 1.1 per cent and France's CAC added 3.6 per cent.

"The markets have been over-doing the gloom," said Peter Dixon, an economist at Commerzbank in London. "Most of the bad news has got to be in the price at these levels."

Europe's rally was extended yesterday as Wall Street took heart from Federal Reserve Chairman Ben Bernanke saying that another economic stimulus plan may be needed to revive lagging growth.

At the time European markets closed, the Dow Jones industrial average was more than one per cent higher.

Investors took further comfort from the three-month Libor rate falling more than one-third of a percentage point, its biggest one-day drop in nine months. This signalled that banks may have the confidence to lend to each other again, which is crucial to energising the world economy.

Governments around the world have pledged more than $3 trillion to guarantee bank deposits and interbank lending and Dutch bank ING became the latest to need government support, with Dutch authorities pumping in €10 billion. ING shares leapt more than 29 per cent.

Among other European banks, Royal Bank of Scotland gained 23.2 per cent, Barclays gained 7.1 per cent and HSBC rose 5.4 per cent.

"For the first time in a while, traders were able to arrive at their desks and not have to hit the ground running," said David Evans, market analyst at BetOnMarkets.com.