Bullish sales and earnings updates from retailer Hennes & Mauritz and engineering firm ABB, plus asset sale plans by media giant VNU helped European shares rebound from a 2004 low yesterday.

Market heavyweight Bayer was another strong climber after Morgan Stanley raised its rating on the German drugs and chemicals group to "overweight" from "equalweight" and raised its price target to €27 from €20, citing news from the company's pharmaceutical research pipeline.

Merger and acquisition activity also lent strength to the market after Belgian drugmaker UCB agreed to buy Britain's biggest biotechnology firm Celltech for £1.53 billion. Celltech shares rose by over a quarter, and UCB closed four per cent lower.

But fears about surging oil prices, continuing violence in the Middle East and the likelihood of higher US interest rates continued to sap sentiment and put a lid on the market's advance.

The FTSE Eurotop 300 index of pan-European blue chips gained 0.8 per cent to close at 966.5 points, up from Monday's 2004 trough of 951.95 points, in relatively thin volumes as strategists said the recovery lacked conviction.

News of surprisingly strong economic growth from Japan was offset by a weaker-than-expected German investor confidence survey, which sparked concern over the strength of domestic demand and economic growth prospects in Europe's largest economy.

"The fifth successive fall in Germany's ZEW business conditions index in May underlines that it is still going pear-shaped for the German recovery," said Bear Stearns economist David Brown.

"With all the signs of stronger growth coming through in the rest of the global economy, it simply accentuates the euro zone's failure to pick the baton up for faster recovery."

The DJ Euro Stoxx 50 index gained 0.6 per cent to around 2,675.8 points.

Although strategists widely expected Opec to raise its oil output to cool oil prices near 21-year highs, they said sustained market gains were unlikely while the spectre of abrupt monetary tightening in the US and China threatened to smother global economic growth.

"The bottom line is we are going through a correction over the summer months, and there is not going to be a catalyst to turn the market round in the short term," said Clive McDonnell, European strategist at Standard & Poor's Equity Research.

The market expects the Federal Reserve to raise US interest rates when it meets on June 29-30, and only after then will investors be able to begin assessing prospects for the second half of the year, Mr McDonnell said.

On Wall Street by 1545 GMT, the Dow Jones industrial average had risen 0.6 per cent to 9,966 points, while the tech-rich Nasdaq Composite had gained 1.1 per cent to 1,897.

Markets cheered ABB after the company promised its shareholders profitable growth and Moody's upgraded its debt rating, underscoring the Swiss engineering firm's turnaround and boosting its shares by 4.5 per cent.

Swedish fashion retailer Hennes & Mauritz was another bright spot, up 3.9 per cent after it beat expectations with a 13 per cent rise in April sales, ending a string of revenue growth disappointments blamed on bad weather.

Capgemini, Europe's largest computer consultancy, rallied 5.8 per cent after winning a 10-year contract worth more than $3.5 billion to provide business and computer consulting services to Texas power company TXU. The deal will help Capgemini deliver on its promises to halt a decline in sales, dealers said.

But investor unease about the prospects for stock markets took the shine off the initial public offering of shares in France's smart card maker Axalto, which fell 5.4 per cent on their Paris debut.

Dutch publisher VNU rose five per cent after it said it was mulling the sale of its telephone directories unit, which brokerage Petercam valued at between 2.2 and three billion euros.

Other standout movers were German financial adviser MLP, as a 52 per cent jump in first-quarter net profit pushed its shares 16.4 per cent higher.

French heavy engineering firm Alstom erased Monday's bounce to slip 14.8 per cent as sources told Reuters the group was proposing a capital increase of slightly over two billion euros as a part of a deal between the European Commission and the French government on how to rescue the company.

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