European stocks rose on Monday, driven by utility shares as merger speculation boosted Iberdrola, and by a drop in the price of crude oil.
Iberdrola was a major gainer, rising by more than 7 percent after Repsol, the company's second largest shareholder, said it saw no alternative to a merger between the company and Gas Natural, which rose 4.5 percent.
Rivals EDF, Centrica and Suez gained between 3 and 5.5 percent, helped by Iberdrola and investor optimism on the outlook for stable earnings within the sector.
The FTSEurofirst 300 index of top European shares ended 1.3 percent higher at 1,178.69 points. The index fell 1.3 percent on Friday.
Oil and gas producers were among the top performers on the broader market despite a lower oil price, as traders cited a rebound from weakness last week.
BP, Total and Royal Dutch Shell were up 2.5-4 percent.
"The fact that the sellers have been so persistent and there's been nothing but selling over the last six weeks means I think we are due a period of remission," said Mike Lenhoff, chief strategist at Brewin Dolphin.
"If on top of that we get something like some decent news out of the commodities markets, oil in particular, that's great," he said.
Crude oil was trading more than 3 percent lower, having earlier hit a session low of $140.12 a barrel, while the dollar rose against a basket of major currencies.
But analysts were dubious over the resilience of the rally in the equity market, given the prospect of slower economic growth, stubbornly high commodity prices.
"We are still cautious for the short-term as we expect ongoing high raw material and energy prices and bad news from the economic front to keep being a burden for European stock markets," Raiffeisen Bank said in an equity research note.
"The markets are in a state of high nervousness. Uncertainty about the full implications of the financial crisis and fears of higher inflation are reducing risk aversion," said AXA Investment Managers, estimating that continental European corporate earnings will fall by about 10 percent this year.
Banks Recoup Losses
Banking shares reversed an early slide and recovered some gains, as HBSC, ING and UniCredit rose 0.9 to 2.3 percent.
UBS lost 2.5 percent and Credit Suisse fell 1.9 percent after a Swiss weekly publication, citing lawmakers, said Swiss authorities could require the two banks to set aside an additional $68.3 billion in capital.
Other gainers included independent mobile phone retailer Carphone Warehouse, which rose 6.2 percent after Goldman Sachs added the stock to its "pan-European buy list".
But overall, retailers fell 0.1 percent, led by Marks and Spencer (M&S), down 4.4 percent, on bearish analyst views in the wake of last week's profit warning from the British clothes, food and homewares group.
"The weaker UK consumer outlook and inherent cyclicality of M&S' model means that M&S will not be able to maintain its dividend for 2010, which we have cut by a third to 15 pence," JPMorgan said in a note, reiterating its "underweight" rating and slashing its price target to 200 pence from 345 pence.
Other declining stocks included German health care company Fresenius AG, which slid 9.3 percent after news of its $3.7 billion acquisition of U.S.APP Pharmaceuticals .
Traders cited concern about capital-raising measures and the price.
Battered UK midcap mortgage lender Bradford & Bingley (B&B) shed 16 percent as concern about its future persisted.
The company was forced to increase a planned rights issue to 400 million pounds ($789 million) on Friday after U.S. investor TPG Capital pulled out of buying a stake.