European shares rise to highest close since Jan

European shares rose to their highest close in more than four months on Tuesday, driven by optimism about a financial sector recovery, though gains were limited by U.S. housing starts falling to a record low.

The FTSEurofirst 300 index of top European shares rose 1.2 percent to a provisional close of 869.82 points, its highest close since Jan. 8.

The index, which fell 45 percent in 2008, is up 34.8 percent from a lifetime low of March 9.

Banks added most points to the European benchmark.

BNP Paribas, Deutsche Bank, HSBC, Banco Santander, Societe Generale and UniCredit rose between 3.3 and 6.5 percent.

Investors bought financials amid hopes that the sector was coming out of its worst phase since the 1930s, and 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.

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.

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

"Some say the rally ended on May 8, but I believe it has a lot further to go."

The Dow Jones, S&P 500 and Nasdaq Composite were flat as European bourses were closing.