Banks lead Europe share rally after Buffett plan

LONDON (Reuters) - Banks drove European stocks up by more than 3 percent on Tuesday after U.S. billionaire investor Warren Buffett offered to reinsure municipal bonds held by top bond insurers, soothing some of the most recent credit concerns.

HSBC (HSBA.L) was the top positive influence on the broader market, rising 4.6 percent, while Santander (SAN.MC) gained 3.8 percent and Barclays (BARC.L) jumped 6.2 percent.

The FTSEurofirst 300 index .FTEU3 of leading European shares ended 3.4 percent higher at 1,334.2 points, just shy of the day's high of 1,334.4, with gains stoked towards the close. The ratio of advancing issues to decliners was about 14 to one by the close of trading hours.

U.S. shares were also sharply higher.

Buffett told CNBC television the offer, which he extended to bond insurers MBIA (MBI.N), Ambac (ABK.N) and FGIC, would cover $800 billion in municipal bonds.

Shares in MBIA and Ambac have fallen in the last 12 months between 80 and 90 percent, battered by concern over their exposure to the subprime crisis.

Bond insurers guarantee more than $2.4 trillion in debt and have been struggling to hold on to their top credit ratings after suffering heavy losses from backing mortgage securities that have plunged in value.

"Basically that was driving the market higher today," said Fortis Bank strategist Philippe Gijsels in Brussels.

"(Buffett) is apparently only looking to buy the good part of the business, but clearly, it is helpful and shows a number of things, firstly, there is money around to go into these markets ... and there is smart money going in."

The FTSEurofirst is still showing a loss of around 11 percent for the year to date as investor confidence in the outlook for corporate profitability has been shaken by a spreading economic slowdown.

REVERSAL OF FORTUNES

Financials, and insurers in particular, came under pressure early in the day as Monday's news of an accounting hole in the derivatives portfolio of American International Group (AIG.N) triggered renewed fears over their subprime exposure.

But virtually all components of the insurance sector had recouped those losses by the afternoon. Swiss Re (RUKN.VX) gained 3.6 percent, Munich Re (MUVGn.DE) rose 2 percent and Royal & Sun Alliance (RSA.L) gained 4.4 percent.

Shares in Credit Suisse (CSGN.VX) pared earlier losses incurred after the Swiss bank scaled back its full-year 2007 subprime writedowns, but also reported a 49 percent fall in fourth-quarter profit. Subprime writedowns in the fourth quarter were 1.26 billion francs, Credit Suisse said.

"These writedowns are towards the higher end of expectations, and importantly, there is still significant residual risk left on the balance sheet," Goldman Sachs analysts said in a research note.

Credit Suisse shares ended the day up 2.5 percent.

Auto stocks also recovered earlier losses, helped by General Motors GM.N, which posted a loss in the fourth quarter but said it expected the lackluster North American market to rebound in the second half of 2008.

A reading of German investor sentiment that staged a surprise rise in February also supported the sector. Daimler (DAIGn.DE) gained 5.3 percent while BMW (BMWG.DE) rose 4.7 percent.

Shares in French carmaker Peugeot (PEUP.PA) added 5.2 percent after WestLB upgraded its recommendation on the stock to "add" from "hold", saying its recent weakness was overdone. German truckmaker MAN (MANG.DE) rallied 6.4 percent.

Sanofi-Aventis (SASY.PA) rose 1.9 percent after the drugmaker unveiled a 6.2 percent rise in quarterly net profit and a big increase in its 2007 dividend as tight cost controls offset lower sales.

Miners rallied despite lower base and precious metal prices. BHP Billiton (BLT.L) gained 4.9 percent, Rio Tinto (RIO.L) rose 5.4 percent and Anglo American (AAL.L) gained 4.7 percent.

Anglo-Swiss miner Xstrata (XTA.L) rose 0.4 percent. Shares initially fell after the Financial Times said the company had rejected a cash-and-shares takeover approach from Brazil's Vale (VALE5.SA) pitched at just under 40 pounds a share, or 39 billion pounds ($76 billion).

The paper cited a person close to Vale saying the Brazilian group was "close to walking away from the whole thing".

Xstrata declined to comment.

(Additional reporting by Eva Kuehnen and Peter Starck in Frankfurt and Sitaraman Shankar in London; Editing by David Holmes)