* FTSEurofirst 300 up 0.3 pct
* BP, Saipem fuel energy rally after results
* Deutsche Bank, UBS hit, raise buffers for legal costs
LONDON, Oct 29 (Reuters) - European shares rose modestly on Tuesday as estimate-beating results at BP and Saipem fuelled a surge in the oil sector, a major laggard of this year's equity rally.
British oil major BP rose 4.9 percent, the biggest boost to the pan-European FTSEurofirst 300 index, as it unveiled forecast-beating results, a dividend hike, and a promise to sell more assets and return the proceeds to shareholders.
The report raised market expectations ahead of updates from other oil majors such as Royal Dutch Shell later this month and helped to send the STOXX Europe 600 Oil & Gas index 1.5 percent higher.
"BP's actions this morning raise the bar for others across the sector. Investors want to see cash being returned to shareholders, ideally in the form of dividends but also share buybacks," Neill Morton, an analyst at Investec, said.
"In the energy space we're not out of the woods yet regarding underperformance, but to some extent any recovery depends on the action of managements."
Oil stocks were up just 1.8 percent for the year at the close on Monday, lagging a 14 percent rally for the broader market on concerns about falling oil prices and rising costs.
Of energy companies that have reported so far, 75 percent have missed analyst estimates, compared to 47 percent for the market as a whole, contributing to the negative investor sentiment on the sector, StarMine data showed.
Among the least-loved stocks has been Italian oil services group Saipem. It confounded market bets for a third profit warning on Tuesday by confirming its earnings for the year.
Around 15 percent of Saipem shares available to be borrowed were out on loan to short sellers in the run to the results, Markit data showed, a multi-year high if periods around dividend payments, when arbitragers borrow the stock for tax purposes, are excluded.
Short sellers borrow a security and sell it, betting they will be able to buy it back at a lower price before returning it to the lender, bagging the difference.
BP and Saipem were among the top risers on the FTSEurofirst 300 index, which was up 0.3 percent at 1,286.96 points at 1128 GMT.
Finnish handset maker Nokia topped the index after recording what traders describe as a smaller-than- expected drop in operating margin at its telecoms equipment unit.
The FTSEurofirst has struggled to make much headway since hitting a five-year high a week ago, hit by concerns about banks, mixed earnings reports and uncertainty about the U.S. Federal Reserve's future monetary policy.
Deutsche Bank and UBS, recently hit by allegations over a scam to manipulate inter-bank lending rates, fell on Tuesday as they said they were holding more capital to deal with legal costs. 1/8ID:nL5N0IJ092
"They (regulators) are looking for a pound of flesh ... and I think that's the way it's going to be from now on," said Nick Xanders, head of strategy at BTIG. "The sector has started to roll over and I think it will continue."
The STOXX Europe 600 Banking index has fallen 2 percent in the past week, hit by mixed earnings and concerns about a review of euro zone's bank balance sheets that may result in some lenders having to raise capital.
Traders said many investors would also avoid taking on big new equity positions before a Federal Reserve meeting which begins on Tuesday. The Fed is not expected to make any shift in monetary policy this week as it waits for more evidence of how badly Washington's budget battle hurt the U.S. economy.