European shares closed higher yesterday, with financials and automakers the major gainers, and with more evidence of economic recovery in the United States.

The FTSEurofirst 300 index of top European shares rose 1.6 per cent to a provisional close of 984.40 points, more than recouping the previous session's losses.

The benchmark index has gained more than 52 per cent since hitting a record low in early March.

Banks added most to the index. Societe Generale gained 4.6 per cent, boosted by solid third-quarter performance at its French retail banking division and more bid speculation.

Barclays, Banco Santander, BNP Paribas, HSBC and UBS were up between 1.2 and 4.2 per cent.

The Fed is expected to reaffirm its intention to keep US interest rates at ultra-low levels for a long time to support the economy, even as signs of recovery accumulate.

Data from two sources helped boost sentiment on the US economy. The US service sector grew in October for the second consecutive month but at a slower pace than forecast.

US companies reduced jobs in October at the slowest pace in more than a year, suggesting some stabilisation in the labour market as the economy emerges from recession, a report showed.

US private employers shed 203,000 jobs in October, fewer than a revised 227,000 jobs lost in September, a report by ADP Employer Services said. The September fall was originally reported at 254,000.

"Equities are in a sweet spot at the moment, said Jeremy Batstone-Carr, analyst at Charles Stanley.

"Interest rates are low. Growth is apparently taking place, and investors think this is a good time to be in the riskier assets."

"But they are walking a narrow tightrope. One might argue that the gains today boil down to the two words 'extended period' in relation to the Fed's' continuation of its easing of policy."