European shares rose for the second straight day yesterday, buoyed by banks such as ING Group and Barclays which took their cue from US financials after economic data that raised hopes of a recovery.
The FTSEurofirst 300 index of top European shares closed 1.6 per cent higher at 745.14 points, clawing back intra-day losses of as much as 1.8 per cent.
The late afternoon rally tracked a similar Wall Street swing into positive out of negative territory on the back of US manufacturing and home sales data.
The US Institute for Supply Management (ISM) said its index of national factory activity rose to 36.3 in March, above economists' median forecast of 36.0, from 35.8 in February.
"This gain is the third consecutive monthly increase... the recent months' stabilisation gives rise to the hope that the worst contraction of the economy might be over," said Commerzbank analyst Bernd Weidensteiner.
Separately, the US National Association of Realtors said its pending home sales index based on contracts signed in February was up 2.1 per cent. Economists polled by Reuters had expected a 1.0 per cent rise.
"Any signs of recovery will see the (stock markets) rally show a bit of leg," said David Buik at BGC Partners.
"It may be choppy for the next three months but a strong autumn rally cannot be ruled out. Banks look good," he said.
The European benchmark index is down 10.4 per cent this year, hit by the global economic downturn, but has risen 15.4 per cent since hitting an all-time low on March 9.
Tracking the Wall Street trend for financial stocks, banks added most points to Europe's top-300 index and notched up the best DJ Stoxx sectoral performance with a rise of 3.9 per cent.
ING was up 8.4 per cent, Barclays added 6.1 per cent, Credit Suisse gained 5.9 per cent and BNP Paribas put on 5.5 per cent.
Vienna Insurance Group surged 13.3 per cent after announcing a surprise bonus dividend on top of its regular payout.
Also among the risers was Vodafone, up 4.4 per cent after Goldman Sachs upgraded the stock to "buy" from "neutral" and added it to its "conviction buy" list. The DJ Stoxx telecoms index gained 2.5 per cent.
Heinz-Gerd Sonnenschein, equity strategist at Germany's Postbank, said market sentiment remained fragile.
"People are still very nervous," he said. "I don't think we are on track for another upward bounce".
Worries about the fate of the US auto industry, and the implications for car makers in Europe, were "hanging over the market," Mr Sonnenschein added.
Energy stocks were Europe's top losers, slammed by a four per cent fall in oil prices after US crude inventories hit a 16-year high.
In the sector, Petroplus sank 6.8 per cent, Royal Dutch Shell lost 2.5 per cent, BP fell 2.2 per cent and Total eased 1.3 per cent.
Among losers elsewhere, Lafarge shed 5.8 per cent after the world's biggest cement maker launched a 1.5 billion euro rights issue at a deep discount.