Europe shares pare gains after U.S. housing data

European shares were higher on Tuesday on optimism that the financial sector was coming out of its worst crisis since the 1930s but gains were scaled back on data showing U.S. housing starts fell to a record low in April.

At 1334 GMT, the FTSEurofirst 300 index of top European shares was up 0.8 percent at 866.36 points, compared with the day's high of 876.47 points.

The index is still up more than 34 percent from the lifetime low it hit on March 9.

The U.S. Commerce Department said housing starts fell 12.8 percent to a seasonally adjusted annual rate of 458,000 units, the lowest on records dating back to January 1959, from March's upwardly revised 525,000 units, denting hopes that stability in the housing market was imminent.

Analysts polled by Reuters had expected an annual rate of 520,000 units for April.

The Dow Jones, S&P 500 and Nasdaq Composite were down between 0.1 and 0.4 percent in early trade.

Ed Menashy, strategist at Charles Stanley, said equity markets had over-reacted to the hosuing data. "A major change can't be judged on one set of figures," he said.

"You would need several figures from this industry to see whether the forces of decline are receding. I am very hopeful that the pace of decline in U.S. housing is slowing down."

Banks added most points to the European benchmark.

BNP Paribas, Deutsche Bank, HSBC, Societe Generale and UniCredit rose between 3 and 5.2 percent.

Investors bought financials amid hopes that the sector was readying to rid itself of government crutches.

Goldman Sachs, Morgan Stanley and other U.S. banks have applied to repay billions of dollars in government aid in an effort to signal their strength, sources said.

And a person familiar with the matter said that Britain has held talks with investors to gauge their interest in buying its stakes in part-nationalised lenders.

Across Europe, Britain's FTSE 100 and France's CAC 40 were up 0.2 percent, Germany's DAX was up 1.4 percent.