European shares rebounded yesterday, as investors scooped up beaten-down shares in sectors such as telecoms, but lingering interest rate worries on both sides of the Atlantic meant the market's advance was fragile.

Takeover speculation also gave a boost to a selection of European shares, with Corus up 2.3 per cent amid talk that it will eventually join in a consolidation race in the steel industry. Corus's upbeat comments on the rest of the year also helped prop up shares of the Anglo-Dutch company.

The pan-European FTSEurofirst index of 300 leading shares gained one per cent to end at 1,306.63 points.

But the index shed 5.2 per cent in May, its biggest monthly loss since January 2003.

At that time, investors worried about the impact that the impending war on Iraq would have on a budding US economic recovery and on oil prices. This time around, worries are that inflationary pressures stoked by runaway oil prices could force central banks to tighten borrowing costs further and risk hurting economic growth.

News of surprisingly large drops in German and French unemployment provided further evidence of accelerating economic growth in the eurozone, but the good news was coupled with warnings about rising prices.

This raised the chances of a half and not quarter point rate rise at next week's European Central Bank's policy-setting meeting.

Investors also awaited minutes of the May 10 FOMC meeting, at 1800 GMT, for clues on the Federal Reserve's rate policy intentions and the likelihood of another rate hike in June.

"With UK and eurozone PMI data plus the US ISM survey all due tomorrow, then the non-farm payrolls on Friday, there's certainly the potential for further volatility in the near term," said Jimmy Yates, trader at CMC Markets in London.

"With sentiments the way they are, any suggestion that US rates are going much higher in the months ahead could end up weighing."

Around Europe, London's FTSE 100 index and Frankfurt's DAX both added 1.3 per cent, while Paris's CAC 40 gained 0.7 per cent and the Swiss Market Index was up 0.9 per cent in Zurich.

Telecoms stocks led gained, with France Telecom adding 4.2 per cent, TeliaSonera up 3.3 per cent and British mobile giant Vodafone gaining 12.7 per cent a day after it boosted shareholder payouts.