European stock markets closed higher yesterday, recovering from early losses on a new ratings downgrade for Greece as investors took their lead from fresh takeover activity.

Dealers said the Moody's Greek downgrade to junk status was eye-catching but did no more than confirm what many believed to be the case anyway so the impact was limited to some extent.

At the same time, a massive $11.5-billion bid by Rupert Murdoch's News Corp for the outstanding 61 per cent it does not own in British pay-TV operator BSkyB gave sentiment a boost, encouraging more speculative trade.

Merger and acquisition activity often drives markets and usually reflects a more confident mood while a solid opening yesterday on Wall Street after a strong New York regional manufacturing survey also helped.

Dealers said there was still some bargain-hunting after recent sharp losses but investors will be hoping for a new lead shortly if the momentum is to be maintained.

In London, the benchmark FTSE 100 index of leading shares closed up 0.30 per cent at 5,217.82 points. In Paris, the CAC 40 gained 0.98 per cent to 3,661.51 points and in Frankfurt the DAX added 0.82 per cent to 6,175.05 points.

On Wall Street, the blue-chip Dow Jones Industrial Average was up 1.32 per cent at around 1630 GMT with the tech-rich Nasdaq Composite gaining 1.81 per cent.

European markets initially fell "after a sell off in US markets last night after Moody's cut Greece's credit rating by four notches," said Arifa Sheikh, an analyst at London-based fund manager GLC.

London then picked up and led the way as news of the News Corp bid at 700 pence for BSkyB sent the shares soaring after the company turned down the offer.

BSkyB said 700 pence per share was too low and that it would be prepared to support a formal bid only "in excess of 800 pence per share."

BSkyB closed up 16.57 per cent at 700 pence.

News of the bid sent shares in the German pay TV channel Sky Deutschland, where News Corp holds a 45.2 per cent stake, up more than 18 per cent on speculation Mr Murdoch might try the same thing.

ProSiebenSat1 meanwhile rose more than three per cent on the lead.

Such interest helped offset much worse-than-expected German investor confidence data which reflected fears over eurozone debt strains and austerity measures that could dampen growth.

The volatile, forward-looking financial sector indicator compiled by the ZEW research institute lost 17.1 points to 28.7 points, well below an average analyst forecast for a modest drop to 42.5 points.

"Economic sentiment is weakened by the uncertainty about the future developments of the debt crisis and the perspective of necessary cuts in public expenditure in EU-member countries," a ZEW statement said.

This was the lowest level for the index since April 2009, when it stood at 13 points, and represented "a worrying sign for the future", Capital Economics senior economist Jennifer McKeown commented.

Michael Hewson, market analyst at CMC Markets, noted that "BP continues to remain under pressure after Fitch downgraded its debt six notches from AA to BBB, two notches above junk status" because of the Gulf of Mexico oil spill.

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