European stocks scale three-year peaks

European shares closed at three-year highs yesterday, shrugging off weakness in German stocks after an inconclusive election, as crude prices rose nearly six per cent and boosted oil majors.

BP and Total added more than 1.5 per cent after US light crude surged back towards $67 a barrel on fears a new storm system was heading for the US Gulf Coast and after Opec dashed hopes for immediate extra supply.

The pan-European FTSEurofirst 300 index, which welcomed 10 new entrants, closed 0.2 per cent higher at 1,216.4 points, its highest closing level since May 2002.

Frankfurt's 30-share DAX fell 1.2 per cent, nearly halving its early losses but still down on worries of a stalemate in German politics as parties scramble to form coalitions which could water down much-hoped-for reforms.

Heavily-weighted utilities E.ON and RWE were among the largest decliners.

Angela Merkel, who had touted measures to reinvigorate Europe's biggest economy, won a majority so narrow that Chancellor Gerhard Schroeder refused to concede. However, stocks were not as badly hit as some had feared.

"The restructuring reforms at a corporate level have happened (in Germany) independent of what political reforms actually took place," said Rohini Rathour, analyst at investment firm Sarasin Chiswell.

"Companies off their own bat went to talk to the unions and found ways of cutting costs, and I think this process won't stop so the outlook for equity is not in any way terribly negative.

"I think additional political reforms may come through but the pace is not clear. It would have been nice to have an outright majority and therefore a government with a mandate to go and actually do things."

The high oil price and jitters ahead of today's Federal Reserve meeting, where they are expected to again raise interest rates, hurt the Dow Jones industrial average, which led European stocks to trim gains late on.

The UK's FTSE 100 index outperformed the rest of Europe, rising 0.4 per cent to hit a four-year high of 5,429.7.

Unilever was a standout gainer, up more than one per cent on hopes the Anglo-Dutch consumer goods firm will scrap its dual listing.

The stock was also buoyed by a note from Goldman Sachs which said a break-up of Unilever might be on the cards after the firm announced a review of its European frozen foods arm on Friday.

Dollar earners such as drug stocks were also helped by the euro sliding to a seven-week low against the dollar.

GlaxoSmithKline, which makes the bulk of its profits in the US market place, rose 1.3 per cent.

Shares in Finnish handset casing maker Perlos rallied 16 per cent after it raised its third-quarter sales and profit forecast on stronger-than-expected demand.

Nokia, the biggest client of Perlos, had raised its quarterly sales and profit estimates last week.

Telenor rose four per cent after Finnish telecoms software firm Comptel said it will buy two units from Telenor subsidiary EDB Telecom.