Oil, builders lift European stocks, but ISM weighs

European shares ended solidly higher yesterday as high oil prices spurred energy stocks and the expected rebuilding effort in the hurricane-hit US Gulf Coast lifted construction firms with exposure there.

Key indexes were pulled back from intra-day highs, however, by a weaker-than-expected report on US manufacturing that added to jitters about the prospects for world growth.

The FTSEurofirst 300 index ended 0.7 per cent higher at 1,185.83 points, according to preliminary data. The narrower DJ Euro STOXX 50 closed at a preliminary 3,284.32 points, up 0.6 per cent.

Both indexes had been up some 0.8 per cent before the U.S. Institute of Supply Management's (ISM) August index of manufacturing activity came in at a weaker-than-expected 53.6, down from 56.5 a month earlier.

"There are genuine concerns. The hurricane is going to hit American growth. But the global economy is generally very good," said Hilary Cook, director of investment strategy at Barclays Stockbrokers.

European Central Bank President Jean-Claude Trichet, meanwhile, revised down euro zone growth forecasts, sending euro zone bond yields to record lows.

Mr Trichet said higher oil prices could weigh on growth but there was no significant evidence of a buildup of underlying inflationary pressures.

High oil prices - which eased to around $68.75 a barrel yesterday but were still close to their $70.85 record - also remain a major source of concern for investors, wary that costs are squeezing consumer spending and hurting businesses.

But high prices also stoke demand for oil majors' stocks. Total was up 2.3 per cent and BP gained 0.9 per cent.

Royal Dutch Shell Plc ended up 0.9 per cent despite agreeing to pay $9.2 million and adopt certain corporate governance principles to settle shareholder lawsuits related to an oil reserves-overbooking scandal last year.

Construction-related firms with exposure to the United States such as Lafarge and Wolseley were also among the biggest market gainers as investors expected them to benefit from the post-hurricane reconstruction effort.

"It is of course too soon to evaluate exactly the impacts but it has to be reminded that (cement) production capacities are very stretched in the United Sates. So any additional demand should be satisfied by imports," said Exane BNP Paribas analyst Elisabeth Blaise.

Lafarge ended up 2.9 per cent and Wolseley gained 2.8 per cent.

Shares in Holcim, the world's second-biggest cement maker, gained 1.0 per cent, while Spain's leading builder ACS was up 3.0 per cent, also helped by a forecast-topping 28 per cent rise in first-half net profit.

Outside the sector, other standout movers included Carrefour which gained 1.3 per cent as investors welcomed first-half earnings in line with expectations and the French retailer's guardedly optimistic outlook.

Diageo rose 1.6 per cent despite a slight fall in annual profits as the spirits group said it was set for a pickup in growth this year.

Swiss jewellery maker Richemont gained 1.6 per cent after US peer Tiffany posted forecast-beating results.

Shares in Norwegian engineering group Aker Kvaerner traded 7.0 per cent up after it said it would hit its 2006 annualised core profit target earlier than expected.

Talk of corporate activity was rife, boosting sentiment. Exel shares surged 17.3 per cent after the logistics firm confirmed it had received a bid from German mail giant Deutsche Post, while German chemical maker BASF rose 1.4 per cent after a board member was quoted as saying that it was on the lookout for acquisition targets in North America.