European shares rose on Thursday in their most volatile day of trade in over three months after a flurry of mixed U.S. data and the European Central Bank's surprise shift in its stance towards monetary policy.
Pharmaceutical stocks were among the biggest gainers throughout most of the day, although banks ousted drugmakers from the top spot in afternoon trade.
The ECB delivered a widely expected quarter-point rate rise to euro zone rates.
But markets were taken by surprise when ECB President Jean-Claude Trichet said in remarks after the decision he had "no bias" towards monetary policy, which investors interpreted as a signal no more increases were forthcoming for now.
This helped bank stocks, which usually benefit from an environment of steady or falling rates, pushing up shares in BNP Paribas, Royal Bank of Scotland and Societe Generale by more than 4 percent.
The DJStoxx European banks index rose 2.5 percent, making it the best performer of the 18 DJStoxx sectoral indices.
The FTSEurofirst 300 index of top European shares closed the session at 1,178.04, showing a 0.9 percent gain.
The index swung between losses of up to 1.6 percent and a gain of 1.2 percent, making this its most volatile trading day since late March.
"The vast majority of analysts were anticipating the European Central Bank would have raised rates today," said Henk Potts, a strategist at Barclays Stockbrokers.
"They also anticipated a very hawkish statement to come through from that and it was certainly nowhere near as strong as many had expected," he said.
In the run-up to the ECB meeting, financial markets showed a quarter-point rise to 4.25 percent was fully priced in and analysts signaled the possibility of a half-point increase given the ECB's warning over the threat of inflation and its commitment to fight a sustained increase in price pressures.
No Sign of Increases
Trichet did not use either of the phrases "heightened alertness" or "strong vigilance," which have heralded past rate rises.
"He is very clearly signaling that he has no intention of tightening again: "starting from here, I have no bias" - you can't get clearer than that," said James Shugg, international economist at Westpac.
European equities have underperformed U.S. stocks this year, due in large part to the ECB's signal it is prepared to take whatever measures necessary to anchor euro zone inflation, while the Federal Reserve has aggressively cut U.S. rates to 2.0 percent from 5.25 percent last September.
The FTSEurofirst is down 22 percent so far this year, while the Standard & Poor's 500 has lost around 14 percent.
U.S. data showed the economy did not shed more jobs than feared in June, although activity in the service sector, which makes up the largest part of total economic activity, contracted unexpectedly last month.
U.S. benchmark indexes were all up between 0.2 and 0.9 percent.
The DAX-New volatility index, which is based on options on the German blue-chip DAX and can act as a measure of European investor risk aversion, briefly hit its highest in nearly three months.
Pharmaceutical stocks contributed to the advance in the broader market as investors switched into traditional safe haven assets.
AstraZeneca, GlaxoSmithKline and Sanofi-Aventis rose between 2.6 and 3.7 percent, extending Wednesday's rally.
Energy and steel shares were among the worst performers of the day, driven lower by persistent investor concern about the outlook for the global economy and demand for hard commodities such as oil or metals.
Swedish steel maker SSAB shed 5 percent and ArcelorMittal lost 3.3 percent, while ThyssenKrupp fell 0.3 percent.
"The rate of growth in steel consumption outside of China has declined to close to nothing," analyst Alan Coats at HSBC said, adding he expects steel prices to fall to $900 a metric tonne by the first quarter of 2009 from a peak of $1,200 per metric tonne in the third quarter of 2008.
Although crude oil futures held below $145 a barrel, oil and gas shares were among the largest drags on the market.
BP and Total were down between 0.4 and 1.1 percent, while BG Group and StatoilHydro were down 2.1 to 2.7 percent.