European shares hit a six-week closing high on Monday as the weakening euro boosted export-sensitive stocks such as carmakers, while fighting between Russia and Georgia gave early support to oil prices and helped the energy sector.
The FTSEurofirst 300 index of top European shares closed up 1.2 percent at 1,212.92 points, having hit an intra-day high of 1,213.42 points, its highest since June 26.
Oil eased to below $114 after the European market close, having risen earlier by as much as 1.5 percent, as the conflict between Russia and Georgia disrupted some Caspian shipments.
This pushed BP, Royal Dutch Shell, ENI and Total up by 1.1-2.2 percent.
But some analysts said softer oil prices would only act as a temporary pillar of support for the broader equities market, given the likelihood of a further slowing in economic growth in Europe and the uncertainty over the extent of the impact of the credit crunch on the financial sector.
"The backdrop is still very negative and the outlook for the oil price is positive," said Andrea Williams, head of European equities at Royal London Asset Management.
"Generally, if you look at where earnings numbers have come out, we haven't had the massive downgrades that people thought, particularly on the financial side. We've still got ING and UBS to go but certainly, the worst is through for writedowns, so it is more an issue of credit market deterioration," she said.
The euro rallied from the lows for the day against the dollar, but its fall to near-six month lows earlier gave the automotive sector a boost.
"A weaker euro/stronger dollar would be a welcome source of relief for a beleaguered auto sector," Morgan Stanley said in a note to clients.
"We highlight BMW as the most exposed to the dollar as a percentage of profit and with the most shallow hedging policy currently in place, creating the potential for more relief in 2009," the investment bank added.
The DJ Stoxx index of European auto stocks was up 2.8 percent with BMW up 4.5 percent, Porsche up 5 percent and Peugeot up 2.9 percent.
Daimler, which gained 2.4 percent, also rallied after a report said Abu Dhabi Investment Authority (ADIA) was interested in buying a large stake in the car maker.
Daimler declined to comment on the report.
Other gainers included financial stocks, led by a 5.4-percent gain in Swiss bank UBS after the company said the cost for a buyback of debt securities would not exceed $900 million.
UBS reports second-quarter earnings on Tuesday.
French bank Natixis rallied nearly 20 percent, as traders cited talk of short-covering in the stock and possible sovereign wealth fund interest.
Natixis declined to comment on the share price rise.
Royal Bank of Scotland was up 3.5 percent, while UniCredit rose 0.7 percent and Banco Santander gained 2.6 percent.
Merger activity had a muted effect on the mining sector, where Kazakhmys raised its stake in rival Eurasian Natural Resources (ENRC) to above 25 percent and Xstrata looked to raise more than 5 billion pounds to forge ahead with a hostile bid for platinum miner Lonmin.
Kazakhmys fell 1.1 percent, Xstrata lost 1.3 percent and Lonmin dropped 0.6 percent, while ENRC shed 5.7 percent after Kazakhmys said it had no immediate plans for a bid.