European shares rose on Wednesday as reassuring comments on banking from the U.S. Federal Reserve and signs that UK mortgage lender Bradford & Bingley (B&B) would be bailed out buoyed financial.

Banks rose on a broad front, with Lloyd's TSB up 6.3 percent, Barclay's 6 percent, Credit Agricole and Royal Bank of Scotland 5.3 percent, CS Group 4.6 percent, Deutsch Bank 4.2 percent and UBS 3.6 percent.

The DJ Stoxx European bank index was the top sectoral performer with a gain of 2.9 percent, trimming its year-to-date loss to 34 percent.

Banking stocks have suffered amid concerns about the impact of last year's meltdown in the risky U.S. subprime mortgage market, which has forced many financial groups to book major asset writedowns and seek emergency capital injections.

At 1115 GMT, the FTSEurofirst 300 index of top European shares was up 1.2 percent at 1,174.99 points. The European benchmark, which lost 1.5 percent on Tuesday, is down 22 percent so far this year.

"The market is driven mainly by financial," said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Germany.

Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open longer than it initially intended.

Separately, sources said six clearing banks in Britain had agreed to back the underwriters of B&B's rights issue after the troubled mortgage lender's share price fell further below the planned issue price on Tuesday.

"What Ben said about keeping the window open longer, this and Bradford & Bingley getting money ... these are positive signs," Sonnenschein said.

But investors remained cautious as tensions surrounding Iran's nuclear programme pushed oil prices higher after Tuesday's steep drop. Iranian state media reported that the country had test-fired missiles with a range that could reach Israeli and U.S. bases in the region.

"We are walking on thin ice ... We will have shaky days and weeks ahead of us. We have no clear signs that we can move up strongly," said Sonnenschein.

Dominique Strauss-Kahn, the International Monetary Fund's managing director, said it was hard to know how far the global financial crisis still had to run, with the extent of further credit losses hinging on the U.S. housing sector.

"What is sure is that the consequences for the real (economy) sector of the financial crisis are still in front of us," Strauss-Kahn said.

SLOWER GROWTH

The European Union's statistics office downgraded its gross domestic product growth estimate for the Euro zone to 0.7 percent in the first quarter from 0.8 percent previously.

The foreign trade surplus for Germany, Europe's largest economy and the world's top exporter, narrowed more than expected in May as exports fell sharply, adding to evidence that economic growth slowed sharply in the second quarter.

"The (stock) market is in the process of adapting expectations to a less optimistic view of the macro environment," Goldman Sachs said in a research note.

"And what looks cheap now may not look that cheap in the near future, should fundamentals turn even less friendly going forward," Goldman said, referring to equity valuations.

Many such valuation metrics rely on corporate earnings estimates, and Societe Generale in a strategy note said: "It may now be the turn for 2009 earnings to be revised down," as current expectations of over 13 percent profit growth in Europe next year looked "increasingly unlikely".

The focus of investors, analysts and traders is shifting to the second-quarter corporate earnings season traditionally kicked off by U.S. aluminum producer Alcoa, which posted stronger-than-expected results late on Tuesday.

Miners were among the biggest gainers in Europe, with Xstrata rising 3.2 percent, Vedanta up 2.9 percent and BHP Billiton 2.5 percent higher.

Among losers, Sanofi-Aventis fell 1.5 percent, with Citigroup pointing to downside risks from generic competition to sales in Europe of the French pharmaceutical maker's blockbuster blood thinner Plavix.

"Assuming the genericisation spreads to all EU sales, we estimate the EPS (earnings per share) hit could be 9 percent," Citigroup said in a note.

WPP Group fell 2.2 percent after the world's second-largest advertising company launched a hostile bid worth 1.08 billion pounds ($2.13 billion) for British market research firm Taylor Nelson Sofres (TNS).


By Peter Starck, Financial Mirror, 09/07/2008