European shares notch up a third week of gains

A foam figure of a bull is seen in front oft he German share prize DAX index board, as the DAX climbs towards 6000 points during the morning trading session at the stock exchange in Frankfurt October 12, 2011.

LONDON (Reuters) - European shares rose on Friday to register three straight weeks of gains, buoyed by earnings news and strong U.S. retail sales data, with chartists seeing major resistance levels coming into view for testing next week.

Cyclicals such as autos led gainers at the expense of more defensive sectors, although banks lagged again after fresh negative credit ratings agency action weighed on sentiment as G20 finance ministers met for fresh debt crisis talks.

By the close, the FTSEurofirst 300 .FTEU3 index of leading European shares was up 1 percent at 975.52 points, reversing Thursday's fall to resume the October rally that has added 5.6 percent, so far.

TECHNICALS

The index stopped just short of major resistance at 983.38, the 50 percent retracement of its late July to late September fall, while the blue-chip Euro STOXX 50 .STOXX50E hovered near an important gap level, at around 2,400 points.

"A failure to close above the gap this week could suggest a pause in the trend or a pull down to 2,250 at the beginning of next week," Dmytro Bondar, technical analyst at Royal Bank of Scotland, said.

"But once the price sustains above the 50-day moving average, I see a potential to recover above the 2,400 area to 2,441,," he added, the 76.4 percent retracement of the August to November 2008 impulse wave, a longer-term trend guide.

U.S. RETAIL SALES

Tech sector stocks were among the outperforming cyclical sectors, buoyed by overnight results from U.S. bellwether Google (GOOG.O) and similarly bullish numbers from German software firm SAP (SAPG.DE), up 2.1 percent.

Data showing U.S. retail sales grew at the fastest pace in seven months in September also helped underpin the gains, becoming the latest data point to ease fears of a return to recession in the world's biggest economy.

BANKS WOE

Banks proved the sectoral laggard, with the STOXX Europe 600 sector index .SX7P down 0.5 percent, weighed on by sovereign and corporate credit downgrades, bearish broker comment and bond-market pressure as G20 finance ministers met in Paris.

An overnight downgrade of UBS (UBSN.VX) by Fitch, and the placing of peers including BNP Paribas (BNPP.PA) on credit watch negative, was followed by a downgrade of the Spanish sovereign rating by Standard & Poor's on its growth outlook.

The latter cut weighed on Spanish stocks .IBEX, up just 0.4 percent, and pushed yields on its debt higher, as concern about contagion in the event of a default in Greece still a primary concern.

While Italian stocks rebounded from yesterday's lows as Italian yields pulled back slightly, they also remain at highly elevated levels, adding to pressure for a firm and speedy political market-placating answer to the debt crisis.

A Franco-German plan is expected to be announced at a meeting of European leaders starting October 23, and could cover recapitalizing the banking sector, increasing private sector losses on Greek debt and boosting the size of the region's bailout fund for a second time.

"Once investors can do the math they can make proper investment decisions," said Antonin Jullier, global head of equity trading strategy at Citi.

"They need to know how much pain is going to be taken by equity investors, debt investors and how much fresh capital will come from the private sector versus governments. Once they have all that, then they can start making investment decisions."

Adding to the gloom was a Goldman Sachs report suggesting at least 50 of 91 European banks could fail a fresh regulatory stress test including Commerzbank, down 4.9 percent, weighed on by a rating downgrade to "neutral" by the broker.

(Editing by Greg Mahlich)