Italian relief leads euro zone shares to higher close
* Euro STOXX 50 up 0.9 pct, FTSEurofirst 300 up 0.1
* Italian shares outperform, Italy's MIB up 1.6 pct
* Most traders still betting on eventual U.S. debt deal
By Francesco Canepa
LONDON, Oct 4 (Reuters) - European shares rose on Friday, led by Italian stocks and banks as investors welcomed a more stable political outlook in Italy and bet the European Central Bank would continue to support the region's financial sector.
Italy's FTSE MIB was the best performer, extending gains in late trade to end 1.6 percent higher after a parliamentary committee recommended that centre-right leader Silvio Berlusconi be expelled from the Senate following his conviction for tax fraud in August.
Berlusconi threatened to bring down Italy's fragile coalition government earlier this week before staging a last-minute volte-face at a confidence vote on Wednesday.
Euro zone blue chips in the Euro STOXX 50 index rose 0.9 percent to 2,928.31, while the pan-European FTSEurofirst 300 rose 0.1 percent to 1,243.74.
European shares have sharply outperformed their U.S. counterparts since July, helped by an improvement in economic data, cheaper valuations and, more recently, concerned about the U.S. government debt ceiling.
Italian stocks, which trade at the lowest valuation multiple in Europe, have been among the best performers.
"Positive momentum and cheaper valuations are driving the outperformance," Wouter Sturkenboom, investment strategist at Russell Investments, said.
"What's happening in Italy -- first major concerns and then a big sigh of relief -- just ties into the narrative."
Euro zone banks, up 2.3 percent, were the best sectoral performers as traders bet the ECB would be ready to inject fresh liquidity into the banking system via a long-term refinancing operation (LTRO) to prevent the risk of a new squeeze as banks face new capital tests.
Phoebus Theologites, chief investment officer at investment firm SteppenWolf Capital LLC, sold options to sell the Euro STOXX 50 by December as he felt the possibility of a new cash injection would support European equities.
ECB policymakers have sought to temper expectations of another imminent LTRO operation, but Theologites said that just the fact this was an option open to the ECB was enough to support European equities.
"Just the mention of another LTRO by the ECB makes everyone feel a little more comfortable in adding on risk," he said.
The FTSEurofirst 300 hit a 5-year high of 1,274.59 points in late September, while the Euro STOXX 50 hit a 2-year high of 2,955.47 points.
Both markets have since lost ground after the U.S. government had to partially shut down this week due to disagreement among politicians over the budget and investors worried about the $16.7 trillion U.S. debt ceiling, which the government will hit no later than Oct. 17.
"Day by day, people are getting more tense," said Francois Savary, chief investment officer at Swiss firm Reyl.
"But we are betting on the fact that a deal will be found, and this should provide us with the opportunity to increase our equity exposure," he added.