European shares break two-day losing streak

Traders are pictured at their desks at the Frankfurt stock exchange June 15, 2011.

FRANKFURT (Reuters) - European stocks rose on Friday and were set to snap a sixth straight week of losses on hopes a solution for Greece's debt crisis was looming.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were united behind a new aid package for Greece that would include voluntary private sector participation on the basis of the so-call Vienna Initiatives.

European banks, which have significant exposure to Greece and any potential contagion within the euro zone, advanced, with the STOXX 600 European Banks index .SX7P up 1.2 percent after hitting a near two-year low the previous session.

Banca Popolare di Milano (PMII.MI), up 8.9 percent, was the biggest gainer in the index after a report that French group BNP Paribas (BNPP.PA) made an offer for the Italian lender.

Greek banks extended gains with EFG Eurobank (EFGr.AT), National Bank (NBGr.AT) and Alpha Bank (ACBr.AT) up 5.8-7.3 percent.

The European banking index, however, was still down 7 percent year-to-date.

By 1142 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares traded 0.6 percent higher at 1,090.67 points.

"With the newsflow you have seen, the markets are thinking there could be some (political) unity and there is a chance of something being hammered out," said a trader at a leading European investment bank.

"The big thing is the confidence vote (in Greek Prime Minister Papandreou's government) next Tuesday and it is not a given that it gets passed... if the vote of confidence goes against him, we are back down again and all bets are off."

The Greek cabinet was reshuffled on Friday and will face a vote of confidence by Tuesday night.

"Volatility is incredibly high at the moment, but that may also be a good thing because when it reaches a certain level -- perhaps after the Greek decision on Tuesday -- sentiment will have to turn," Oliver Adler, head global economics at Credit Suisse, said.

CONTAGION FEARS

Structured credit analyst Markus Ernst at UniCredit said that even if Tuesday's vote were successful, uncertainty could remain relating to stakeholders in the bailout, specifically controversies between France, Germany and the European Central Bank.

Illustrating the uncertainty in the market, traders continued to flee to safe havens like the German bunds, U.S. Treasuries and the Swiss Franc.

"Even after a potential rescue package is successfully executed, debt restructuring will continue to be a trigger for uncertainty," Commerzbank Chief economist Joerg Kraemer said in a note.

"The risk in major peripheral economies like Italy, Spain and Belgium has increased markedly this week too."

(Additional reporting by Simon Jessop; Graphics by Scott Barber; Editing by Dan Lalor)