European shares closed at fresh three-and-a-half year highs yesterday, led by miners such as Rio Tinto which soared on strong metal prices and with oil producers buoyed by a crude price rising to around $59.

European equity markets continued to be supported by relief that Thursday's European Central Bank interest rate increase - the first in five years - was not the start of an aggressive hiking programme to cut spending.

Insurers extended gains from the previous session with Generali up 2.7 per cent, ING up 1.5 per cent and Allianz gaining 1.7 per cent.

The FTSEurofirst 300 index of pan-European blue chips closed 0.7 percent higher at 1,264.69 points - its highest close since April 2002, finishing the week 1.4 per cent higher.

Looking ahead to next week, commentators expect markets to hover around these levels in the absence of any obvious corporate or economic stimulant to drive them higher as the year's end looms.

"We're certainly seeing a good bounce back and next week we would suggest there would be sideways trading. There are not too many catalysts out there to drive it higher," said Barclays Stock Brokers strategist Henk Potts.

On the losing board, shares in telecoms operator Vodafone fell 2.4 per cent after a CSFB downgrade citing stiff competition in Europe and Swisscom lost 1.6 per cent on news it agreed with the Swiss government's plans to prevent it from making key foreign acquisitions.

Shares in UK ports and ferries company P&O rallied 11 per cent on talk that Singapore's investment agency Temasek will launch a counterbid offer for the UK firm.

Dealers said UBS was buying shares on behalf of Temasek, with one saying the Swiss bank had acquired just over three per cent of P&O's stock.

State-backed Dubai Ports World agreed on Tuesday to buy P&O for £3.3 billion, creating the world's third-largest ports company.

Meanwhile, shares in British telecoms company Fibernet Group Plc fell two per cent after it said that talks about a possible offer for the company had ended.

The gold price rose to a 23-year high, carrying Rio Tinto 4.3 per cent higher to be Europe's leading blue-chip gainer, while Anglo American added 1.9 per cent.

The European basic resources sector index was 2.8 per cent up at a new record, having risen 45 per cent this year.

Insurers advanced with the sector index 1.7 per cent higher and Swiss Life soaring 5.4 per cent after JP Morgan raised its recommendation to "overweight" from "neutral" and the price target to 264 Swiss francs from 171.

"The valuation looks attractive," JP Morgan said.

Shares in Hannover Re surged 5.7 per cent after HVB raised its rating on the German reinsurer to "neutral" from "underperform" and increased the price target to €32.

Also in financials, Alliance & Leicester (A&L) was up 2.7 per cent after the British bank said its profit this year was set to beat analysts' forecasts as revenue has nudged up while costs have fallen significantly.

"The UK mortgage market has been buoyant in Q3 and A&L has shared in the upside," DrKW said in a note. "A&L remains 'as safe as houses' but the balance sheet remains underleveraged."

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