Heavily-weighted banks such as BNP Paribas helped European shares close higher yesterday, with optimism that the Federal Reserve will leave interest rates unchanged for now also lending support.

Other standout movers included Spanish airline Iberia, up 7.5 per cent on market rumours that a merger with British Airways had been agreed, despite strong denials by both companies. BA shares closed four per cent higher.

Celltech surged 7.5 per cent after Britain's leading biotech group said it expected to sign a lucrative marketing deal for its biggest new drug hope during the second quarter of 2004.

Spanish telecoms group Telefonica added 2.1 per cent after a rating upgrade to "outperform" from "neutral" by Credit Suisse First Boston, but French chemicals group Rhodia was a sore spot, off 6.6 per cent on nagging concern over its financing troubles.

The FTSE Eurotop 300 index ended the session 0.6 per cent firmer at 975.8 points. The index stood 5.4 per cent lower than last Monday's 20-month closing high of 1,026.16 after the bombings in Madrid on Thursday and general concerns stocks may be getting too expensive hurt sentiment.

But despite resurgent security fears and continuing weak labour data in the United States, strategists said economic and corporate fundamentals remained attractive enough to lure investors back after a short selling spree.

"The recent wave of pessimism on the global growth outlook is becoming overblown," said strategist Francesco Garzarelli at Goldman Sachs.