LONDON (MarketWatch) -- European shares gained sharply on Monday, after Kraft Foods made an unsolicited bid for Cadbury and ignited hopes that a revival of merger-and-acquisitions activity will form another stepping stone on the way to a recovery. The pan-European Dow Jones Stoxx 600 index (ST:SXXP 237.20, +3.35, +1.43%) rose 1.4% to 237.01, the third straight day of gains for the index. On a regional level, the U.K. FTSE 100 index (UK:UKX 4,933, +81.48, +1.68%) rose 1.7% to 4,933.18, the German DAX index (DX:DAX 5,464, +79.08, +1.47%) rose 1.5% to 5,463.51 and the French CAC-40 index (FR:PX1 3,653, +54.07, +1.50%) rose 1.5% to 3,652.83. Asian shares traded mostly higher. U.S. equity markets were shut on Monday for the Labor Day holiday. See Asia Markets. Cadbury (UK:CBRY 783.00, +215.00, +37.85%) was the standout performer on Monday with shares of the chocolate maker up 38% to 783 pence after Kraft Foods (KFT 28.10, 0.00, 0.00%) said it has made a cash-and-stock offer of 10.2 billion pounds ($16.7 billion), or 745 pence a share, for the U.K. confectioner. Cadbury has rejected the bid but Kraft said it's committed to working toward a recommended transaction and to "maintaining a constructive dialogue." See full story. The move lit up the rest of the sector. Danone (FR:BN 38.99, +1.47, +3.92%) shares rose 3.9%, Unilever (UK:ULVR 1,657, +35.00, +2.16%) climbed 2.2% and Lindt & Sprugli (CH:LISN 27,500, +1,500, +5.77%) climbed 5.8%. Shares of Nestle, which has been mentioned as a possible Cadbury counterbidder, rose 0.5%. See London Markets. Read more on Cadbury. The move by Kraft is significant for the broader equity market, said Mike Lenhoff, chief strategist at Brewin Dolphin believes. "It's evidence from key players that they share in the growing confidence in the outlook. If we were still in the midst of the recession, it's doubtful that we would have seen this kind of activity," he said. "Companies are starting to think about the future and positioning themselves in a market that's likely to be recovering," he said. Through Friday, European mergers-and-acquisitions activity has been at the lowest levels since 2005, though the pace of M&A activity has been higher in the third quarter than the second, according to data compiled by Thomson Reuters. See related First Take. On a more general note, Bernard McAlinden, strategist at NCB Stockbrokers, said: "M&A activity is as a rule supportive of sentiment in the equity market. It's pushing a bit of cash back in the market. Any new cash is supportive." Deal speculation touched other sectors in Europe as well, with shares of Deutsche Telekom (DE:DTE 9.45, +0.03, +0.27%) (DT 13.49, 0.00, 0.00%) , up 0.5% Dow Jones Newswires reported Monday, citing people familiar with the situation, that Deutsche Telekom and France Telecom (FR:FTE 18.12, +0.28, +1.54%) (FT 5.10, +0.01, +0.20%) will merge their U.K. operations in a deal to be announced Tuesday. See full story.

Source