Stocks in Europe rise sharply as policy action looms

European shares jumped on Monday, led by bank and insurance stocks on hopes euro zone leaders will unveil fresh measures to fight the region's debt crisis, ahead of a summit next week.

Stock markets were boosted by German and French efforts to outline proposals for a fiscal union before a European Union summit on Dec. 9, seen by investors as possibly the last chance to avert a breakdown of the single currency area.

The move also helped lower the cost of insuring regional governments against default.

At 1225 GMT, the FTSEurofirst 300 index of top European shares was up 2.7 percent at 931.31 points, led by banking stocks.

However the broader rally, extending Friday's recovery from 7-week lows, was seen as technical, with low volumes suggesting conviction behind the gains was weak.

"The fact that many technical indicators have slumped to three-month lows suggests that a trading bounce might be imminent. A 38.2 percent retracement of the latest decline gives a short-term upside target of around 944," said Bill McNamara, technical analyst at Charles Stanley.

Trading volumes were 30 percent of the 90-day average by midday. The euro zone's blue-chip Euro STOXX 50 index was up 3.5 percent at 2,184.37 points. On Friday the index had slipped into 'oversold' territory with its 9-day relative strength index (RSI) falling below 30.

"A significant price recovery remains unlikely, since only verbal statements by Merkel and Sarkozy can hardly generate enough momentum for lasting confidence," said Arne Cordes, director Debt Markets Rates Sales at WestLB.

The Euro STOXX 50 volatility index, Europe's yardstick of investor sentiment known as the VSTOXX, remained around 40, signalling a lack of investor appetite for risky assets such as equities.

BELGIAN BANKS LEAD GAINS

Belgian banks were leading the sector index after the country's government negotiators over the weekend secured an agreement on a budget for 2012, helping assuage concerns about the value of Belgian government bonds that the lenders hold.

Shares in KBC, rose 11.4 percent, while Dexia , the troubled Franco-Belgian lender which was bailed out last month, won 10.8 percent.

Banks with exposure to Italy benefited from a report in Italian newspaper La Stampa suggesting the International Monetary Fund was preparing a rescue plan for Italy worth up to 600 billion euros, later dismissed by an IMF spokesperson.

The STOXX Europe 600 Banks index rose 4.5 percent. The STOXX Europe 600 Insurance index was the second-biggest sector gainer and was up 3.7 percent.

Both indices are underperforming other sectors. The bank index has lost 37 percent so far this year, while the insurance index is down 20 percent. This compares with a 17 percent drop for the FTSEurofirst 300.

Around Europe, UK's FTSE 100 index was up 2.3 percent, Germany's DAX index up 3.4 percent, and France's CAC 40 up 3.9 percent.