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Wed Jul 23, 2008 7:14am EDT

* FTSEurofirst 300 gains 1.7 percent as oil falls again

* Auto stocks surge after better than expected results

* Recently beaten-down banks recover

By Blaise Robinson

PARIS, July 23 (Reuters) - European stocks were up 1.6 percent around midday on Wednesday, rising for the fifth time in six sessions as oil continued to fall, while auto stocks rose after a flurry of stronger than expected results.

Recently hammered banks were among the top gainers, with Anglo Irish Bank up 8.1 percent, Credit Agricole up 6.2 percent and Credit Suisse up 5.1 percent.

UK lender HBOS surged 11 percent on market talk of bid interest from Spanish rival BBVA , traders said. Both HBOS and BBVA declined to comment.

At 1052 GMT, the FTSEurofirst 300 index of top European shares was up 1.6 percent at 1,183.45 points. The benchmark index, down 21 percent on the year, has gained 6.6 percent since July 15.

"Last week's troubles at Fannie Mae and Freddie Mac really scared everybody. But now that we saw the Fed coming to the rescue again and that oil prices are retreating, the market is correcting on the upside," said Marc Touati, economist at Global Equities, in Paris.

"And on the U.S. macro front, it looks like the worst is behind us now."

Oil continued its retreat on Wednesday, with U.S. crude oil futures CLc1 down $2.51 at $125.94 a barrel as fears that Hurricane Dolly would hit Gulf of Mexico crude supply faded.

The drop in oil, which is now down more than $20 after hitting a record above $147, eased recent concerns over inflation and rising costs for companies.

Oil-sensitive shares of airlines were among the biggest gainers, with Air France-KLM up 5 percent and British Airways up 2.8 percent.

"We can start to think about inflation pressure easing," said Philip Isherwood, strategist at Dresdner Kleinwort.

"It starts to take some of the pressure off central banks and (let) them think more about economic weakness than about inflation expectations."

CARMAKERS RISE

Shares of automakers were also on the rise, after Volkswagen , PSA Peugeot Citroen and Fiat defied gloomy forecasts.

Volkswagen gained 4 percent, Peugeot added 8.5 percent, Fiat rose 7.4 percent, while Porsche gained 6.7 percent and Renault added 4.1 percent.

But shares in Volvo fell 3 percent after the world's second-largest truck maker said it saw signs a U.S. slowdown was spreading across the Atlantic to its biggest market, Europe. The firm's second-quarter pretax profit beat market forecasts, while the operating profit matched consensus.

Around Europe, Germany's DAX index .GDAXI was up 1.2 percent, UK's FTSE 100 index .FTSE up 1.4 percent and France's CAC 40 .FCHI up 1.7 percent.

Vodafone gained 2.3 percent after announcing a surprise 1 billion-pound ($2 billion) share buyback programme, saying a big share price fall in the wake a trading update a day earlier left the stock undervalued.

Merck KGaA fell 3.9 percent after the drugs and chemicals group said the high-end margin target for its highly profitable liquid crystals business of 52 percent this year is almost impossible to reach.

STMicroelectronics gained 4.2 percent after Europe's largest chipmaker narrowed its second quarter net loss and said it had market share gains across various industries where it sells its products.

Later in the session investors will eye results from a slew of U.S. companies, including Anheuser-Busch , Boeing (BA.N: Quote, Profile, Research, Stock Buzz), Hershey and Pfizer . They will also likely cast an eye on the Federal Reserve's Beige Book summary of economic conditions, which is due to be released after the close of European markets. (Additional reporting by Rebekah Curtis in London; Editing by David Cowell)