European shares closed higher yesterday, ending a four-day losing streak, as Royal Bank of Scotland led a resurgent banking sector, while investors reacted positively to US housing data.

The FTSEurofirst 300 index of top European shares provisionally closed two per cent higher at 730.58 points, after hitting a six-year low on Wednesday. It has fallen more than 12 per cent so far this year after plummeting 45 per cent last year.

RBS jumped 26.8 per cent after the company said it would put £325 billion ($463 billion) of its assets into Britain's bank insurance scheme as it reported the biggest loss in British history.

"For me, this is the frail attempt of a bear market rally. It may not be sustainable enough, but if the markets go into the weekend on a positive note, I could imagine that gains will continue next week," said Giuseppe-Guido Amato, strategist at Lang & Schwarz in Germany.

Banking stocks gained, with UBS, Deutsche Bank, BNP Paribas and Société Générale all up between 9.4 and 16.2 per cent.

Allianz yesterday posted a worse-than-expected loss in 2008, saying it had been hit by losses at Dresdner Bank hit by turmoil at Dresdner Bank, which Allianz sold to Commerzbank in a deal completed last month.

Allianz rose 10 per cent as investors were relieved its problem child had now found a new home, while Commerzbank fell 0.5 per cent. UBS surged 13 per cent after it named Oswald Gruebel, who masterminded a turnaround at arch rival Credit Suisse, as its new chief executive. Marcel Rohner resigned after barely 18 months as CEO, during which time UBS shares fell some 85 per cent.

Banking and insurance shares were by far the biggest gainers yesterday, with Lloyds up 25 per cent, Swiss Re up 14 per cent and ING up 13 per cent.

Pharmaceutical stocks, which have outperformed the market recently, were on the downside, with Sanofi-Aventis down 1.2 percent and AstraZeneca down 0.5 per cent.

Telefonica rose 5.3 per cent after the telecoms operator said it was maintaining its 2010 growth targets and forecast a one per cent to three per cent rise in operating income before depreciation and amortization (OIBDA) in 2009.

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