European shares rose on Monday in trading dominated by merger activity that swept several sectors, including brewers and banks, while a U.S. mortgage rescue plan underpinned the broader equities market.
Global stocks took heart from a U.S. Treasury and Federal Reserve plan that called for sweeping measures to lend money and buy equity if needed in the government-sponsored enterprises, Fannie Mae and Freddie Mac, which own or guarantee $5 trillion in debt -- close to half of the value of all U.S. mortgages.
But fresh concern about the impact of the credit crisis on the financial sector stripped U.S. stocks of their early gains and pushed the European market back from the day's highs.
Banks were still the top gainers in Europe, helped in part by the prospect of a safety net for the two mortgage lenders, and by Spain's Santanderwhich said it had reached a deal to buy British bankAlliance & Leicester.
A&L shares surged 53 percent, while Santander was flat.
The FTSEurofirst 300 index of top European shares was up 0.7 percent at 1,133.95 points, having risen earlier by as much as 1.8 percent.
"The market in some ways is relieved that the authorities in the United States have been able to come up with a solution to cope with the problem of funding for Freddie Mac and Fannie Mac. However, there is a realization that there are still some fundamental factors which are creating negative sentiment in the global markets right now," said Barclays strategist Henk Potts.
The threat of runaway inflation, record-high oil prices and the likelihood of slowing economic growth and its drag on earnings have driven the FTSEurofirst down by about 30 percent in the last year. The index is at its lowest in three years.
"There is a bit of relief that it seems for the short-term problems of those specific financial institutions a solution has been put forward but there are still some massive, massive hurdles to overcome before investors can start being confident about the future," Potts said.
Even though analysts expressed doubt that the U.S.-backed plan would cure the ills of the broader financial system, European banks staged a recovery with the DJStoxx European banks index adding 1.1 percent.
Barclays rose 0.8 percent, Lloyds TSB rallied 2.5 percent and BNP Paribas gained 2.4 percent.
"The fact that the U.S. institutions and congress are bailing out the U.S. institutions Freddie Mac and Fannie Mae draws a line under the financial system and shows that anything really important to the system will not be allowed to fail," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe.
Santander, which has long been considered a potential buyer of Alliance & Leicester, said it would pay $2.6 billion for the British bank.
The company has been able to secure a knockdown price after a collapse in A&L's share price in the past year.
"It is a positive deal for Santander because it allows them to gain market share in the UK for a very good price," analyst Sandra Neumann at WestLB said. "They were in discussion before but no price was settled on. Now the UK banks are of course very cheap."
InBev fell 3.4 percent after U.S. brewer Anheuser-Busch accepted a sweetened $52 billion takeover bid from the Belgian beermaker.
Analysts voiced relief a bidding war could be avoided.
Dutch mail group TNT rallied 26.4 percent on the back of a newspaper report that U.S. peer FedEx was in early talks to acquire the group. TNT and FedEx declined to comment.
German tyre and automotive systems maker Continental rose by more than 21 percent amid talk of bid interest from Schaeffler Group. Continental said it held talks with Schaeffler.
Other gainers included Philips, which rallied 6.4 percent after beating consensus forecasts with its second-quarter earnings as its consumer business held up against a weaker economic backdrop.
Spanish construction group Ferrovial rose 4 percent after it announced a key step in its long-awaited refinancing plans for its British unit BAA.
Monday's decliners included energy shares, which fell as crude oil held around $145 a barrel.
Total and Royal Dutch Shell fell 1 to 1.3 percent, while BP was flat.