REFILE-Banks, commodities lift Europe stocks 7.5 pct

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* FTSEurofirst 300 .FTEU3 closes 7.51 percent higher

* Investors brace for possible U.S. rate cut

* VW biggest faller in Europe, Porsche among top gainers

* Banks and oil sectors lend biggest sector support

(updates with closing prices)

FRANKFURT, Oct 29 (Reuters) - European shares closed more than 7 percent higher on Wednesday, led by banks and commodity stocks ahead of a U.S. interest rate decision widely expected to yield a cut.

At its close, the pan-European FTSEurofirst 300 index .FTEU3 was up 7.51 percent higher at 897.06, closing at its intraday high.

"There are a lot of things to be positive about on the market at the moment, with just a bit of nervousness ahead of the U.S. interest decision mixed in," said Hank Potts, equity analyst at Barclays Wealth.

"Valuations look cheap, simply too much bad news has been coming down the pipeline lately and the markets appear to have priced in a collapse, which looks too excessive despite the hurdles that many companies face," Potts added.

The index has shed around 41 percent so far this year, amid turmoil across the financial markets that has seen banks broken up or nationalised and left investors fretting about the onset of global recession.

Wall Street headed slightly higher on Wednesday as investors overlooked an early opportunity to lock in profits on Tuesday's strong gains and instead focused on hopes that the U.S. Fed will slash rates.

The Federal Reserve is set to announce its rate verdict at 1815 GMT. In a Reuter's survey, primary dealers expected the Fed funds rate will be cut to 1 percent from 1.5 percent.

Japan may also cut borrowing costs this week, a source with knowledge of the matter said. Tokyo's Nikkei average .N225 soared 7.7 percent.

European banks were the outstanding gainers, with HBOS leading the sector, up 28.2 percent, follower by Santander (SAN.MC) up 14 percent, UBS (UBSN.VX) up 15.8 percent, and Standard Chartered (STAN.L) adding 30 percent.

Oil and gas producers also boosted the market, with BP (BP.L) and Royal Dutch Shell (RDSa.L) gaining 9.6 and 12 percent, respectively, and Total (TOTF.PA) up 13.6 percent as U.S. crude oil rallied 4.5 percent.

Basic resource providers were also strong, as the sector gained 16 percent.

Anglo American (AAL.L), Arcelormittal MTP.PA and Salzgitter (SZGG.DE) were some of the sector's best performers, rising between 12 and 20.9 percent. VOLKSWAGEN SHAKES UP DAX

At the other end of European shares, Volkswagen (VOWG.DE), dove 45 percent as the sharpest faller after its largest shareholder Porsche (PSHG_p.DE) took steps to ease a squeeze on short-sellers that had more than quadrupled the stock in days and briefly made it the world's most valuable company.

The Frankfurt stock exchange, meanwhile, said it would cut the weighting of VW's shares on the blue-chip German DAX index .GDAXI.

The prospect of a reweighting gave an additional boost to other German bluechip heavyweights as they stand to benefit from the prospect that index-tracking funds may need to up their holdings to mirror the index's new composition.

Siemens (SIEGn.DE), BASF < BASF.DE>, Daimler (DAIGn.DE), Allianz (ALVG.DE) and E.ON (EONGn.DE) all stand to benefit and they gained between 20 and 23 percent as five of the top six gainers on the Dow Jones Euro STOXX 50 .STOXX50E

Porsche stock, meanwhile, leapt 38.9 percent after the automaker announced it may sell up to 5 percent of the ordinary shares it holds in VW in order to help settle hedging transactions held by other investors.

Looking ahead to tonight's interest rate decision analysts said they expected the Fed to cut rates by half a percentage point.

Around Europe, Britain's FTSE 100 .FTSE added 8 percent, Germany's DAX .GDAXI was 0.3 percent lower, and France's CAC .FCHI rose 9.2 percent. (Reporting by Tyler Sitte. Additional reporting by Rebekah Curtis and Tricia Wright in London; Editing by Hans Peters)