Europe shares end higher as banks offset oil fears

European shares rebounded yesterday as investment bank stocks such as UBS benefited from record profits by Lehman Brothers, but a two per cent surge in oil prices kept a leash on sentiment.

Vodafone rose 1.7 per cent as Morgan Stanley predicted more growth and increased market share for the cell phone giant. This offset weak construction stocks after Bouygues warned that the buoyant French housing market would start running out of steam in 2006/2007 after a six-year rally.

The pan-European FTSEurofirst index of 300 blue chips rose 0.3 per cent to end at 1,205.3 points.

Frankfurt still lagged behind other European markets as expectations of Sunday's election in Germany will produce a hung verdict and delay reforms continued to worry investors.

Oil prices were another concern, surging 2.2 per cent to $64.50 a barrel after US crude stocks fell 6.6 million barrels in the week ended Friday, more than four times what oil analysts expected.

The latest rise rekindled worries of squeezed consumer spending and corporate profit, even though some market watchers pointed to further signs that record gasoline prices were slowing growth in global energy demand.

Investors also digested fresh US industrial output data that showed the initial impact of the devastating Hurricane Katrina that battered the US Gulf Coast. Last month's industrial output grew just 0.1 per cent as the storm hit at the end of the month, compared with forecasts for a 0.3 per cent rise.

Market watchers were still torn between the risks and benefits the storm could create for the world's biggest economy. "If energy prices continue to retreat from their current highs, it is likely that the rebuilding of the region will prolong the current cycle for the US economy as a whole," said Tom Sowanick, wealth management strategist at Merrill Lynch.

"Federal spending to repair and rebuild the Gulf area will give some lift to the economy in 2006, and that prospect should help the financial markets from reacting to indications of a temporary slower economy."

Mr Sowanick added, however, that the new burst in government spending posed risks to both inflation and long-term interest rates.

Back in Europe, the Swiss Market Index gained 0.5 per cent, bolstered by Credit Suisse and UBS. Both stocks rose around one per cent after industry giant Lehman Brothers posted a stronger-than-expected 74 per cent surge in quarterly profit.

Other climbers included France's Thales, up 1.1 per cent after the new co-chief executives of aerospace group EADS, often seen as a bidder, said they were still following the firm closely. Takeover speculation helped traders shrug off forecasts of weaker net profits due to restructuring charges when Thales reports first-half results today.

Fiat rose 1.5 per cent after its chief executive said the company expected to wrap up its alliance negotiations with Ford Motor by the end of next month, with investments likely to be split equally.

Data showing new European car sales advanced 7.5 per cent last month on new models and aggressive discounting buoyed some auto stocks while news from the Frankfurt Motor Show also helped the sector.

On Wall Street, the Dow Jones industrial average was 0.1 per cent firmer at 10,604.4, while the technology-rich Nasdaq Composite Index shed 0.1 per cent to 2,168.8.