Banks lead European shares higher after EBA review

* FTSEurofirst 300 up 0.2 pct, Euro STOXX 50 rises 0.4 pct

* Banks best-performing sector

* Traders relieved over watchdog's update on banks' capital

* Technical patterns supporting European markets - traders

By Sudip Kar-Gupta

LONDON, Oct 4 (Reuters) - European shares rose on Thursday, with banks the best performing sector on relief that an update from regulators on the health of the industry painted a less gloomy picture than some had feared.

The market was also underpinned by technical factors that were inhibiting any major pull-back over worries about the euro zone debt crisis.

The FTSEurofirst 300 index

rose 0.2 percent to 1,103.11 points, recovering from two consecutive days of slight losses. The euro zone Euro STOXX 50 index


by 0.4 percent to 2,502.47 points.

The STOXX European bank index

rose 0.7 percent, after traders expressed relief over the update from the European Banking Authority.

The EBA reported late on Wednesday that EU banks had collectively raised 205 billion euros ($264.5 billion) in new capital to help them fight the effects of the debt crisis.

It said four lenders had failed: Italy's Monte dei Paschi

; Cyprus' Marfin Popular Bank and Bank of Cyprus; and Slovenia's NKBM.

"The banks are up on some relief over their capital requirements. It's only some of the smaller banks that didn't pass the test," said Adrian Slack, head of equities at Bastion Capital.

Slack said patterns on the Euro STOXX 50 were showing that the index was in an "upward trend channel" - often used by technical traders to indicate that the market could advance further.

"We seem to be in a positive trend at the moment, and until any of that breaks, the support should remain," he said.

Slack saw the Euro STOXX 50 index on an upward trend from 2,464 points onwards, though some traders might sell if it reached 2,520.


Global share markets have rallied since late July, when central banks began to pledge new stimulus measures to fight off the effects of the economic slowdown and Europe's debt crisis.

The FTSEurofirst 300 has risen around 8 percent since the end of July, when European Central Bank head Mario Draghi promised to do whatever it took to protect the euro.

But uncertainty over the timing over a possible sovereign bailout for Spain has capped gains.

Some investors expect Draghi may provide hints about Spain's likely move regarding an international bailout at the ECB's rate meeting on Thursday, which is expected to leave rates on hold.

Spain must first formally request aid before the ECB can activate a bond-buying programme that is aimed at lowering the borrowing costs of debt-ridden states.

"There's just a little bit of optimism that there could be some more easing coming from the ECB," said Berkeley Futures associate director Richard Griffiths.

Griffiths said his firm had bought Euro STOXX futures contracts

, which were up 0.4 percent, but might look to sell these later on Thursday.

Traders said central bank stimulus measures had pushed benchmark bond yields to such low levels, that investors were still favouring equities over bonds or cash at present, due to the greater yields on offer via equity dividends.

"Whilst the economy doesn't look great, people are looking at the bigger picture and expecting that six months down the road, Euroland is going to sort itself out," said McLaren Securities managing director Terry Torrison.

"The demand for equities is still there. There's no value being in bonds at the moment. Any time we have a pullback, the buyers come back out of the woodwork."

($1 = 0.7751 euros)

(Reporting by Sudip Kar-Gupta; Editing by John Stonestreet)

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