European shares gained yesterday, boosted by a rally in telecoms as investors snapped up undervalued stocks, and gains in banks as takeover talk swirled through the sector.

Among major movers, Scania rallied as Volkswagen bought a stake in MAN to support a three-way truck alliance between the companies, while Airbus parent EADS tumbled after issuing yet another profit warning.

"There is an historic precedent for a rally in the fourth quarter and we see no reason why that shouldn't be repeated this year," said Harry Talbot Rice, a global fund manager at Sarasin Investment Management Ltd.

"Earnings growth seems at a decent level and sustainable, valuations are low, the monetary backdrop seems okay and interest rates have stabilised."

The pan-European FTSEurofirst 300 index closed unofficially up 0.7 per cent at 1,401.9, shy of a near-five-year high of 1,407.5 hit in May, but still up 10 per cent so far this year.

Across Europe, Spain's IBEX 35 index rallied 1 per cent to a record high, while Britain's FTSE 100 added 0.5 per cent, Germany's DAX rose 0.9 per cent and France's CAC 40 added 0.7 per cent.

Among banking stocks, Barclays added 1.8 per cent, while Deutsche Bank rose 2 percent and BNP Paribas gained 2.3 per cent on speculation Citigroup is considering the European banks as possible takeover targets.

"All banks are up on thoughts that Citigroup may consider going back on the acquisition trail in Europe," said Cantor Index's David Buik.