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RTRS: European shares buoyed by banking stocks, ECB eyed
 
By Sarah Marsh

FRANKFURT, Oct 2 (Reuters) - European shares rose by midday on Thursday, as banking stocks climbed on hopes of a recovery after the U.S Senate passed a $700 billion bailout plan and Swiss bank UBS said it would turn a profit in the third quarter.

At 1106 GMT the FTSEurofirst 300 index of top European shares, which is down about 28 percent so far this year, was up 1.5 percent at 1,088.96 points.

"Obviously there is some relief that the rescue package has at least got through the early stages in Congress," said Henk Potts, investment manager at Barclays Stockbrokers.

"Also, the banks are being driven by some more positive comments coming from the likes of UBS ... perhaps suggesting we are getting closer to turning a corner in relation to the problems that the big banks have faced over the last year."

UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) rose 10.4 percent after it said it would make a small profit in the third quarter following a year of losses.

Banking stocks were the top-weighted gainers on the index, with HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz) soaring 14.3 percent, Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz) gaining 16.2 percent and Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) rising 7.5 percent.

Some of the support for the banking sector came from the U.S. Senate, which approved the rescue package late on Wednesday, putting pressure on the House of Representatives to approve a plan that political and financial leaders called crucial to averting economic catastrophe.

The revised legislation is aimed at reinvigorating worldwide credit markets and interbank lending that has frozen while overleveraged financial institutions staggered under the weight of failed mortgages.

But market participants said that the rescue package was not a cure-all, with a worsening economic outlook spurring calls for central banks to cut interest rates.

Gloomy economic data continued to pour in. British house prices fell 1.7 percent in September from August to post their biggest annual drop since comparable records began in 1991, the Nationwide building society said.

ECB VIEW ON ECONOMY EYED

Investors awaited the European Central Bank's rate decision at 1145 GMT. Some analysts said that while they see the bank keeping rates on hold, they also expect it to soften its hawkish tone and acknowledge the mounting downside risks to Eurozone growth.

"We had expected the ECB to hold off from cutting interest rates ... until the first quarter of 2009," said Howard Archer, Chief UK and European Economist at Global Insight, in a note.

"But the rapidly deteriorating Eurozone economic outlook ... means that we are increasingly leaning towards the view that the ECB will act before the end of this year."

Across Europe, the FTSE 100 .FTSE index was up 1.65 percent, Germany's DAX .GDAXI rose 0.5 percent and France's CAC 40 .FCHI added 1 percent.

Miners broadly gained, tracking a rise in key base metals prices and on positive market sentiment.

Kazakhmys (KAZ.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Antofagasta (ANTO.L: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) rose between 0.6 and 3.6 percent.

One of the main drags on the benchmark European index was the automobiles sector , falling 1.6 percent after disappointing U.S. September sales data.

Shares in BMW (BMWG.DE: Quote, Profile, Research, Stock Buzz), Volkswagen (VOWG.DE: Quote, Profile, Research, Stock Buzz), Porsche (PSHG_p.DE: Quote, Profile, Research, Stock Buzz) and Renault (RENA.PA: Quote, Profile, Research, Stock Buzz) were down between 2 and 4 percent. (Additional reporting by Atul Prakash in London and Peter Starck in Frankfurt; Editing by Erica Billingham)

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