Banking Rally Pushes Euro Shares Higher

European shares rose for a third straight session on Wednesday as a 50 percent surge in Lloyds Banking Group boosted the financial sector which has struggled due to heavy toxic debt and massive writedowns.

Optimism that the new U.S. administration was moving quickly to stabilize the ailing banking sector and Wells Fargo's announcement that it was maintaining its dividend and did not need more taxpayer funds also improved sentiment, analysts said.

The FTSEurofirst 300 index of top European shares provisionally closed 3.2 percent higher at 810.38 points, but is still down 2.6 percent this year after plunging 45 percent in 2008 due to a credit crisis and an economic slowdown which threatens to become a slump.

Lloyds spiked as Citi analyst Tom Rayner said a full nationalization would be "unnecessary and inconsistent with the stated aim of government," and upgraded his stance on the shares to "buy."

Royal Bank of Scotland jumped 44 percent, Barclays gained 18.9 percent, BNP Paribas climbed 20.1 percent and Deutsche Bank advanced 22 percent.

Fortis rose 12.8 percent after the bank said it had reopened talks with the Belgian government and BNP over the asset sales.

"The greater transparency that we have seen from the banking sector in the course of the last few trading sessions alleviated some of the worst fears in the market and allowed the sector to rally," said Henk Potts, equity strategist at Barclays Stockbrokers.

"Undoubtedly, the first quarter of this year is going to be volatile. We continue to recommend that investors stay defensive and invest in large-cap stocks that have strong, reliable earnings streams," Potts added.

Energy shares also advanced, with OMV jumping 8.9 percent, Repsol up 1.9 percent, Total rising 2.4 percent and gas producer BG Group gaining 2.9 percent.

Across Europe, the FTSE 100 index, Germany's DAX and France's CAC 40 were up between 2.4 and 4.5 percent.

Copyright 2009 Reuters. Click for restrictions.