European shares rebounded yesterday, as takeover talks lifted selected stocks such as Lloyds and Suez, but sentiment remained fragile on the eve of a eurozone interest rate announcement.

Drugmakers also stood out, with GlaxoSmithKline up two per cent after agreeing to develop osteoarthritis drugs with Belgian-Dutch biotechnology firm Galapagos, and confirming its interest in buying Pfizer' s consumer healthcare business "at the right price." But gnawing concern that central banks on both sides of the Atlantic could endanger economic growth by tightening credit costs too sharply meant investors stayed away from economically-sensitive sectors such as construction.

The FTSEurofirst 300 index of leading European shares added 0.7 per cent to close unofficially at 1, 289.55 points - still 8.4 per cent below a five-year peak of 1, 407.52 hit a month ago. Investors braced for a potential European Central Bank interest rate rise today, which many feared could be of 0.5 per cent instead of the widely forecast 0.25 per cent.

This added to worries spurred by hawkish comments made by Federal Reserve officials in recent days.

" The Fed's speak does ... suggest that they want to go (raise rates) again at the end of the month, even with the consumer slowing " visibly", as Ben Bernanke put it on Monday, "said David Rosenberg at Merrill Lynch, who said a new rise was not warranted following weaker-than-expected US non-farm payrolls.

"A policy mis-step could be on its way. It's easy to dismiss one or two Fed rate hikes as insignificant. What's one more? But there is always a tipping point," Mr Rosenberg said, adding a new rate rise would not be about economic fundamentals but an attempt by newly-appointed Bernanke's to build its inflation-fighting credentials.