REFILE-European shares hit day's high on euro zone debt deal

(Corrects first bullet point to 0.7 percent from 0.6 percent; also adds reference to Italian banks in third bullet point)

* FTSEurofirst 300 up 0.7 pct

* Banks lead gainers

* Italian lenders Intesa SanPaolo, UniCredit up sharply

By Brian Gorman

LONDON, July 21 (Reuters) - European shares extended gains on Thursday as a draft document showed plans for a wide-ranging response to the euro zone sovereign debt crisis at a meeting of euro zone leaders on Thursday.

Europe is willing to let Greece default under a crisis response that would involve a bond buyback, a debt swap but no new tax on banks, EU sources said as euro zone leaders began a crucial emergency summit.

At 1312 GMT, the FTSEurofirst 300 index of leading European shares was up 0.7 percent at 1,098.78 points, and had gone as high as 1,099.77.

Banks were the main driver, extending a rally into a third day. The STOXX Europe 600 Banking Index rose 3 percent. Heavyweights to gain included Intesa SanPaolo and UniCredit , up 6.8 and 5.1 percent respectively.

Greek banks rose 5.8 percent.

"The (European) banking sector is gaining as news of decisions come out of the European summit, but there is still a possibility of a haircut, rollover or default of Greek debt," said Gualter Pacheco, trader at Go Bulling, in Portugal.

The Euro STOXX Volatility index , down 6.3 percent, reflected the reassuring effect the proposals had for some investors.

However, some traders were sceptical about how effective the proposals would be.

"It's just the same old nonsense rehashed in a slightly different packaging. It's throwing more money at Greece," Michael Hewson, market analyst at CMC Markets, said.

"You can talk about extending the EFSF loans. It doesn't deal with the underlying issue. Greece is technically insolvent. Once you drill down into the detail, does it really solve the underlying issue? On the face of it, no." (Additional reporting by Chico Laxmidas; Editing by David Holmes) (brian.gorman@thomsonreuters.com; +44 20 7542 9128; Reuters Messaging: brian.gorman.thomsonreuters.com@reuters.net))

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