Europe shares hit 16-week high

By Peter Starck

FRANKFURT (Reuters) - European stock markets rallied on Monday, adding to April's record gains, led by energy and industrial engineering shares on the back of economic data suggesting that the recession might be drawing to an end.

The FTSEurofirst 300 .FTEU3 index of top European shares ended up 1.6 percent at 842.70 points, its highest close since January 12. Activity was dampened by a public holiday in Britain.

"We identify a significant improvement in market sentiment and increased risk appetite from investors," said Marfin Analysis in Greece.

Shares in Fiat (FIA.MI) rose 8.1 percent after the Italian carmaker launched a plan to swallow up U.S. General Motors' (GM.N) European operations, notably German Opel, to create a listed European automotive group.

"The spin-off of Fiat Auto to create a new global group would have positive consequences on the stock price," said Banca Akros analyst Gabriele Gambarova, who rates Fiat "buy."

Oil & gas .SXEP ranked among the top sectoral gainers in Europe's benchmark index, which saw its biggest ever monthly rise -- 13 percent -- in April.

Galp Energia (GALP.LS) rose 9.1 percent, Lundin Petroleum (LUPE.ST) gained 6.1 percent, StatoilHydro STL.L added 5.4 percent and ENI (ENI.MI) closed 2.9 percent higher. Crude oil prices rose 1.2 percent to almost $54 a barrel.

Shares in Frontline (FRO.OL), the world's largest oil tanker shipping company, rose more than 25 percent.

Manufacturing activity grew in China and India in April, and declined at its slowest pace in six months in the euro zone, raising hopes that the sharpest economic slump in six decades may have bottomed out. U.S. data showed pending sales of existing homes rose unexpectedly in March.

"The April PMI report still points to a sharp contraction in output but the decline appears to be slowing heading into the second quarter," JPMorgan said in a note on the euro zone PMI.

"The worst of a severe recession may be over," it added.

The European Commission, however, forecast that the economy of the 16-country euro currency zone would shrink 4.0 percent this year and by 0.1 percent in 2010, despite what it called some "positive signals" in recent days.

Some equity strategists said the recent stock market rally, which has seen the FTSEurofirst 300 index shoot up more than 30 percent from its March 9 low-point, may soon grind to a halt.

"Even though the economic data could hardly be weaker, the stock markets cling on almost without hesitation to the last few weeks' upward trend," German bank NordLB said.

"We do not think that the data justify such a trend, despite the fact that stock markets tend to be an early indicator of actual economic developments, and are therefore rather sceptical looking at near-term prospects (for equities)," NordLB said.