* FTSEurofirst 300 up 9.33 points at 1,160.23
* Peugeot rallies on positive broker comment
* ECB rate decision due at 1145 GMT
* Investors eye dovish tone from Draghi
By David Brett
LONDON, July 4 European stocks rallied on Thursday, erasing most of the losses accrued over the previous two sessions, led by French carmaker Peugeot which won a rare vote of confidence from a major broker.
Autos was by far the best performing sector in Europe, leading the FTSEurofirst 300 up 9.33 points, or 0.8 percent, to 1,160.23.
The European index had fallen 1.1 percent since Tuesday on concerns including Portugal's political crisis, which stoked alarm about the country's previously dogged commitment to its bailout programme and prompted the Financial Conduct Authority to temporarily place short-selling bans on four Portuguese stocks.
PSA Peugeot Citroen surged 7.2 percent after Goldman Sachs lifted its rating on the stock to 'buy' from 'neutral' and added it to its 'conviction list' with a share price target of 9 euros, making it one of only two bullish analyst recommendations among the 24 broker ratings on Peugeot tracked by Thomson Reuters.
Goldman cited recent Reuters reports that the Peugeot family might be willing to cede control of PSA as pointing to a potential catalyst that might encourage the market to focus on a sum of the parts valuation.
"We believe that a clear plan to restructure the business would allow the market to revalue PSA's automotive business to 15 percent EV/sales (enterprise value-to-sales) from 3 percent currently," Goldman Sachs said in a note.
Hedge funds have been betting against Peugeot's shares, making it one of the biggest short-selling targets in Europe in the past year. According to data from Markit, 10.2 percent of Peugeot shares outstanding are out on loan.
With volatility - a crude gauge of investors fear - up around 40 percent from levels in May, coinciding with a market fall which was precipitated by worries over stimulus measures being scaled back in the United States, investors will be looking for soothing words and a dovish tone from European Central Bank President Mario Draghi after the latest interest rate decision due at 1145 GMT.
"We are reviewing our modest overweight to equities and while the recent sell off in bonds was overdone, investors should take it as a warning of the potential change in the monetary regime," Chris Godding, managing director at Signia Wealth.
Political unrest in Egypt and resurgent debt worries in both Greece and Portugal have been unsettling European stocks.
Credit Suisse, however, said Europe is stronger now than it was at the onset of previous crises.
"The market became complacent about the scale of leverage in the periphery and overlooked the backtracking on banking reform ... However, we think it is very unlikely that the current episode is going to lead to a 'Grexit'-type scare," its analysts wrote.