European shares bounced back on Friday and were on track to post weekly gains for a third time in a row, with financials rebounding after the previous session's sharp declines and some companies riding on soothing results.
But gains were capped after data showed Britain's economy contracted unexpectedly in the third quarter of this year, squashing hopes of an end to the downturn and instead making the current recession the longest on record.
The FTSEurofirst 300 index of top European shares rose 0.5 percent to 1,019.32 points by 1052 GMT after falling 1.1 percent on Thursday. The index, which fell 45 percent in 2008, is up 23 percent this year and has gained almost 60 percent from a record low hit in March.
In the past two weeks, barring one exception, the index has followed a pattern by rising one day and falling in the next. Analysts said the behaviour showed that investors were cautious in trading.
"That's a clear sign that the positive momentum is losing steam and there is a real risk of a pull back, especially after a rally of 60 percent," said Koen De Leus, economist at KBC Securities.
"Getting into the market now looks to me pretty risky. If you go into the market now, see that you have something to fall back on, like stop-loss orders. See that you have your parachute ready," he added.
Financials were among the top gainers, with the DJ STOXX banking index bouncing back after falling 1.9 percent in the previous session. The sector index was up 0.6 percent on Friday and has spiked 172 percent since its March lows.
Standard Chartered, HSBC, Barclays, Lloyds, Royal Bank of Scotland, Societe Generale and Credit Agricole rose between 1.5 to 3.2 percent.
BNP Paribas, which said late on Thursday its 4.3 billion euro ($6.44 billion) rights issue has been subscribed 2.5 times, added 2.2 percent.
Energy shares also gained ground as crude oil prices steadied to hold above $81 a barrel. BP, Royal Dutch Shell, BG Group, Tullow Oil, Repsol and StatoilHydro added 0.1 to 1.4 percent.
French oil major Total was up 0.5 percent. The company said it has made an offshore oil discovery in Angola.
Across Europe, Britain's FTSE 100 index, Germany's DAX and France's CAC 40 rose 0.8-1.1 percent.
RISK APPETITE RISES
The VDAX-NEW volatility index — a gauge of investor risk aversion — fell to a one-week low on Friday, down 3.2 percent on the day, and flirting with a 13-month low.
The lower the volatility index, which is based on sell and buy-options on Frankfurt's top-30 stocks, the higher is investors' appetite for risky assets such as equities.
"The market is rebounding, but it will remain stuck in a range, at least until we get a clear catalyst," said Alexandre Le Drogoff, technical analyst at Aurel BGC, in Paris.
"Investors have been digesting corporate results and are now starting to focus on the next big macro figures to come."
Miners got strength from higher metals prices, with copper climbing to a fresh one-year high. BHP Billiton, Anglo American, Antofagasta, Rio Tinto, Xstrata and ENRC rose 0.8 to 3.5 percent.
World number two truckmaker Volvo jumped 6.8 percent after it made a smaller third-quarter loss than expected, easing fears it would need more cash from investors, though it still expects sharp declines in its main markets.
French food group Danone was up 1.3 percent after the company said price cuts and a step-up in advertising helped accelerate the recovery in fresh dairy sales volumes in the third quarter.
Syngenta AG, the world's largest agrochemicals maker, was up 2.9 percent. Its chief executive told Reuters that the company is more optimistic about its prospects for 2010 and sees a return to growth.
