European shares rose on Tuesday, led by banking stocks that extended gains after a strong rally in the previous session on the U.S. government's move to take control of top mortgage companies.
A sharp decline in crude prices also eased inflation concerns and lifted market sentiment, analysts said.
At 0906 GMT, the FTSEurofirst 300 index of leading European shares was up 1% at 1,174.86 points after closing 3.3% higher on Monday. But the benchmark is still down 22% this year, battered by a credit crisis that has hit bank stocks especially hard.
Banks were the top-weighted gainer the FTSEurofirst 300 on Tuesday, with Lloyds TSB rising 2.5%, HBOS advancing 3.7%, Standard Chartered Bank gaining 1.9% and Barclays rising 4.9%.
BNP Paribas was up 2.7%, Credit Agricole added 2.8% and Fortis rose 2%.
"Banks have been oversold which is typical of bear markets. Now there has been some rectification and return to some normality," said Howard Wheeldon, senior strategist at BGC Partners.
Stock markets worldwide rose sharply on Monday, powered by financials as investors applauded the U.S. government's move to rescue mortgage financiers Fannie Mae and Freddie Mac.
The markets also got support from U.S. crude futures, which fell sharply as traders shed commodity positions to join the rally in the dollar, which hit a one-year peak against a basket of other currencies on Monday.
CAUTIOUS TRADE
But some analysts remained cautious because of persistent concerns over the global economy and financial markets.
"While it is good news for the market that the U.S. government has seized control of Fannie Mae and Freddie Mac, there are still ongoing global growth woes," said Bernard McAlinden, investment strategist at NCB Stockbrokers.
"Although there is indirect positive sentiment feeding through onto Europe, it does not improve the European mortgage market situation. There are still problems," he added.
Across Europe, Britain's FTSE rose 1.3%, Germany's DAX gained 0.8% and France's CAC was up 0.7%.
Dealing on the London Stock Exchange was halted for several hours on Monday, meaning that activity on Tuesday could be in part an overhang from trades investors were unable to carry out in the previous session.
Energy shares were mixed, with BG Group falling 0.2%, Royal Dutch Shell rising 0.1%, Tullow Oil down 0.1% and BP gaining 0.7%.
Miners fell, tracking weaker metals prices, with BHP Billiton, Anglo American, Lonmin, Kazakhmys, Xstrata, Antofagasta and Rio Tinto all falling between 0.7 and 2.4%.
Shares in Germany's Bayer rose 3.5% on market talk of takeover interest from U.S. rival drugs company Pfizer, traders said. Bayer declined to comment, while Pfizer was not immediately available to comment.
Telekom Austria rose 0.2% after a newspaper report said Egyptian telecoms operator Orascom was looking at buying the company. Telekom Austria declined to comment.
