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Shares Close Higher; Spain Fears Remain

European shares extended gains on Thursday to close higher, after data showed an unexpected drop in U.S. weekly unemployment benefit claims, reviving hopes the world's biggest economy is recovering.

Data showed initial jobless claims fell to the lowest level in more than four and a half years, signaling improvement in the battered U.S. labor market.

The FTSEurofirst 300 Index closed provisionally 0.9 percent higher at 1099.37 points, snapping a three-day losing streak during which the index had lost 1.9 percent.

"We're buying the dips, adding beta in portfolios. The overall newsflow isn't too bad, and we've got profit warnings already so expectations for the upcoming earnings season are not very high, " Talence Gestion fund manager Alexandre Le Drogoff said.

"Even as economic growth remains sluggish, we have the feeling that the safety nets put in place by the ECB will work, and it's a big relief. It basically brings back visibility."

Pressure Mounts on Spain

In Europe, pressure is mounting on Spain to seek a bailout after Standard & Poor's cut its debt rating by two notches to triple-B minus — one notch above junk grade — and placed the country a negative outlook.

In a statement, S&P said Spain's deepening recession is limiting the government's policy options. It is the third time the agency has lowered Spain's rating this year and there are hopes that the downgrade could push a reluctant Madrid into asking for a bailout .

The Spanish IBEX 35 fell in early trade on Thursday before paring losses to close higher.

Late on Wednesday, the head of the International Monetary Fund (IMF) said Greece should be given more time to reach its budget goals. Speaking at the semi-annual summit of the IMF and World Bank in Tokyo, Christine Lagarde said Greece would need an additional two years to get its budget under control.

Luxury Stocks Lead Gains

Luxury stocks paced the gains on Thursday as Burberry's reassuring comments on sales trends — a month after its shocking profit warning — helped the sector reverse a portion of its month-long slide, with traders also mentioning short covering.

Burberry surged 13.6 percent, Louis Vuitton owner LVMH added 4.1 percent and Swiss watch maker Richemont gained 4.5 percent. Christian Dior also closed firmly in the black.

French supermarket operator Carrefour released third-quarter earnings on Thursday with improving sales in France; shares closed around 4 percent up.

Thursday saw the UK's biggest Initial Public Offering (IPO) of the year with the stock market floatation of Direct Line, the Royal Bank of Scotland's insurance subsidary.RBS sold at least 30 percent of its shares in Direct Line.

EADS shares fell and BAE Systems rose on Thursday after the two firms called off a $45 billion merger on Wednesday amid talk of German opposition to the deal.

Stock in coal miner Bumi closed almost 40 percent higher as Indonesia's powerful Bakrie family proposed on Thursday to end links with the FTSE 250 firm.