European shares rally on relief over Spain, U.S. data

* FTSEurofirst 300 closes up 1.4 pct

* Best one-day gain since early Sept.

* Euro STOXX 50 index closes up 1.8 pct

* Relief over Spain bank stress tests

* Strong U.S. data also boost markets

By Sudip Kar-Gupta

LONDON, Oct 1 (Reuters) - European shares rose on Monday, led by financial stocks after relief that Spanish bank stress tests yielded no surprises and helped by strong U.S. data.

The FTSEurofirst 300 index closed up 1.4 percent at 1,104.71, marking the index's best gain since a 2.4 percent rise on Sept. 6. A bank sector index rose 2.2 percent.

An audit, published after markets closed on Friday, found Spanish banks would need 59.3 billion euros ($77 billion) extra capital, and marked an important step towards arranging a potential sovereign bailout for Spain.

Data showing the U.S. manufacturing sector expanded in September for the first time since May gave European stocks a boost late in the session.

"Some of the stress test results have increased confidence in the Spanish banking system, even if Spain will probably still need support from the EU," said Cyrille Urfer, head of asset allocation at Swiss bank Gonet, who holds more high-yield bonds in his portfolio than equities.

Urfer said he would not raise his exposure to European equities for now since the euro zone sovereign debt crisis, which has already led to a major bailout package for Greece and other smaller states, remained unresolved.

"It would be a mistake to run after the market. None of the fundamental economic issues have been resolved," said Urfer.

The European Union said it would be an "economic and social disaster" if joblessness among young Europeans rose further, while euro zone factories had their worst quarter for manufacturing since early 2009.

The euro zone Euro STOXX 50 index rose 1.8 percent to 2,498.81, its best one-day gain since Sept. 14.

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Spanish economy in graphics

Euro zone debt crisis in graphics

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CAUTIOUS STANCE

French bank Credit Agricole topped the FTSEurofirst 300 leaderboard with a 7.4 percent gain after announcing plans to pay Greek peer Alpha Bank 550 million euros to take Emporiki off its hands.

Equity markets have risen sharply since July when central banks around the world started pledging fresh stimulus measures to boost their economies. Those moves - mainly buying bonds - lowered benchmark yields, pushing investors towards equities.

"People are looking at the bigger picture and expecting that six months down the road, euro-land is going to sort itself out. There is very little upside being in bonds at the moment. People are looking at equities and seeing value," a dealer said.

JN Financial senior trader Rick Jones said he had bought futures contracts on Germany's DAX equity index , with a December expiry date, at 7,255 on Friday. He then sold some of these at 7,300 points on Monday before buying them back at 7,310 points. "We are bullish on European equities. We are expecting to see higher ground," he said.

HED Capital head Richard Edwards said he would advise clients to stick with "short" positions - which bet on future falls - on U.S., Spanish and Italian stock markets, and expected markets to remain in a tight trading range.

"This compressed condition may well break upward, in which case we will recommend buying more Germany and perhaps the U.S. and maybe the UK, but not Italy and Spain which remain doomed," he said.

($1 = 0.7749 euro) (Editing by Dan Lalor)

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Keywords: MARKETS EUROPE STOCKS/CLOSE