UPDATE 1-European shares rise by most in a month on U.S. deal optimism
* FTSEurofirst 300 up 1.6 percent, most for a month
* Euro STOXX 50 up 2.1 percent to 2-1/2 year high
* Signs of progress in Washington debt row boost sentiment
By Francesco Canepa
LONDON, Oct 10 (Reuters) - European shares recorded their biggest daily gain for a month on Thursday and euro zone blue chips hit 2-1/2 years highs as signs of progress on ending the Washington budget stalemate allayed the spectre of a U.S. default.
The pan-European FTSEurofirst 300 snapped a three-day losing streak to rise 1.7 percent to 1,245.09 points, its biggest daily gain in a month, after closing at its lowest level since Sept. 5 in the previous session.
The euro zone Euro STOXX 50 index, up 2.2 percent to 2,969.41, hit highs not seen since May 2011 and the cost of insuring against future share price swings, as measured by the VSTOXX index, fell 15 percent from a one-month high.
According to a Republican leadership aide, U.S. House Republicans are considering agreeing to a short-term increase in the government's borrowing authority, staving off a possible default after Oct. 17 and buying time for negotiations on broader policy measures.
"The price to pay for a default would be a depression, so ... they will strike an agreement in the next few days under which the expenses will be cut," François Duhen, a strategist at CM-CIC Securities in Paris, said.
"I do expect more volatility short-term but we would keep a positive bias for equities into 2014."
Duhen expected the STOXX Europe 600 index to rise to 330 points by June, up 6.5 percent from its current level of 310 points, and recommended stocks that depend on an economic recovery in Europe.
European banks, insurers and construction stocks, which are highly exposed to Europe's domestic economy and the stability of financial markets, rose between 2.6 percent and 2.9 percent on Thursday.
"As long as U.S. economic momentum is okay, European economic momentum will continue to improve," said Societe Generale strategist Paul Jackson, who recommended looking for the cheapest companies.
The STOXX Europe 600 banking index trades at 1 time its book value, the lowest multiple of all sectors and on a par with utilities, according to Thomson Reuters StarMine data.
Euro zone lenders such as France's BNP Paribas and Italy's Intesa Sanpaolo are still trading at 20 and 40 percent discounts.
European stocks in general are cheaper than their U.S. counterparts, which has helped them outperform Wall Street since July.
The Stoxx Europe 600 trades on a 12-month forward price/earnings ratio of 12.9 times, against the S&P 500 on 14.2 times, Thomson Reuters Datastream showed.
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