Europe's leading shares posted their biggest gains of the month in late trade yesterday, as investors snapped up equity-heavy insurers and bought France's BNP Paribas after a domestic bidding war heated up.
But a sales warning from Europe's biggest defence company BAE Systems and a weak technology sector helped temper the rally, with mobile phone giant Nokia and German chip maker Infineon among the day's big fallers.
Strategists said they were cautious about the short-term outlook for shares now that markets had retraced a large part of their sharp gains from October's five-and-half-year lows.
"Markets are likely to remain under pressure over the next two to three months but will not necessarily break below October's lows because the better valuations at those levels could attract some buyers," said Saul Henry, European equity strategist at UBS Warburg.
"We remain pretty cautious, as third quarter earnings were not really good enough to justify more gains and because worries over Iraq and the economy remain."
By 1640 GMT, with only Frankfurt still trading officially, the FTSE Eurotop 300 index of pan-European blue-chips was up 1.1 per cent at 893 points, while the euro zone DJ Euro Stoxx 50 index rose 1.2 per cent to 2,516 points.
The benchmark Eurotop recovered by up to 20 per cent after plumbing five-and-a-half-year lows in early October, but has since slipped back by around seven per cent as doubts over the strength of the global economy have resurfaced.
BNP Paribas jumped 4.6 per cent after rival Credit Agricole boosted its stake in former state-owned bank Credit Lyonnais to 17.4 per cent with aggressive open market purchases.
The Credit Agricole move makes it less likely that BNP will succeed in a costly rival bid.
Insurers also fared well after an upbeat earnings outlook from Swiss reinsurer Converium.
Aegon, AXA and Allianz all put on more than 4.5 per cent, profiting also from the market's broader gains because of their heavy equity holdings.
Converium surged 9.7 per cent. The company, which shocked markets this autumn with large reserve additions, now expects to beat analysts' estimates for 2002 profit of some $80 million.
Nordic markets underperformed, despite a surprise liquidity-boosting half-per centage point cut in Norwegian interest rates, as Finnish giant Nokia continued to slip after Tuesday's sales warning.
Shares in the world's biggest mobile phone maker dropped by 1.2 per cent, extending their slide in just over a week to 16 per cent and ensuring the DJ Stoxx technology index posted the day's worst sectoral performance.