* Euro STOXX 50 up 0.5 pct, FTSEurofirst 300 down 0.2 pct * Euro zone banks, Italian and Spanish stocks lead rebound * Volatility rises as investors hedge against U.S. default jitters By Francesco Canepa LONDON, Oct 9 Euro zone shares rebounded on Wednesday, outpacing their British and Swiss counterparts as successful debt sales in Rome and Madrid boosted banks and stocks on the region's periphery. Spanish and Italian stocks rallied after the countries' sovereign bonds sold well, adding to signs of improved sentiment towards the euro zone's struggling southern economies. Italy's FTSE MIB index and Spain's Ibex rose 1 percent and 1.4 percent, respectively, outperforming Switzerland's SMI and Britain's FTSE 100 indexes, down 0.8 percent and 0.4 percent. Euro zone banks, which are exposed to the region's sovereign debt through their bond holdings and rely on economic growth for their core business, rose 1.6 percent, led by Italy's Banco Popolare and Spain's Caixabank. Italian and Spanish shares have outpaced their European peers since July as better economic data lured investors to stocks trading at lower valuation multiples, including banks, telecoms and utility stocks in the periphery. The recent rally, however, has made those valuations start to look full, especially in Spain. "The outperformance of value stocks is a long-term theme but there is scope for some short-term profit taking into the end of the year," Claudia Panseri, global equity strategist at Societe Generale Private Banking. "The fact that the euro zone has climbed out of recession is in the prices by now and we're waiting to see an expansion in earnings." Panseri has a 3,000 point year-end target for the euro zone Euro STOXX 50 index, which was up 0.5 percent at 2,918.02 points by 1444 GMT. The pan-European FTSEurofirst 300 index was down 0.2 percent at 1,228.34 points, a fresh one-month low, weighed down by defensive stocks such as Swiss pharma group Roche and food group Nestle. Lack of progress in resolving the U.S. fiscal deadlock kept sentiment subdued and boosted the Euro STOXX volatility index , which gauges the cost of insuring against future market swings using options, to a one-month high. President Barack Obama said he would only negotiate with Republicans once they agreed to re-open a government in its second week of shutdown, and raise the debt ceiling with no conditions. In this context, investors welcomed news that Janet Yellen will take over as Federal Reserve chairman from next year, which bolstered expectations the U.S. central bank will tread carefully in unwinding equity-friendly stimulus. "It's the Yellen effect that has brought financial market stabilisation," said Oliver Roth, head trader at Close Brothers Seydler.