Banks lead Europe shares up after US, Japan surge

* FTSEurofirst 300 rises 3.3 pct to 861.55 points

* Banks lead rally as investors bet on U.S. rate cut

* VW biggest faller in Europe, Porsche tops gainers

By Rebekah Curtis

LONDON, Oct 29 (Reuters) - European shares surged 3 percent early on Wednesday, led by banks and heartened by major rallies in U.S. and Asian stocks as investors bet on a U.S. rate cut that could help shore up the battered economy.

At 0935 GMT the pan-European FTSEurofirst 300 index was 3.3 percent higher at 861.55 points, rising for a second consecutive day after five days of losses and after hitting a high of 875.04 in early trade.

The index has shed about 43 percent so far this year as a snowballing financial crisis has hammered equities worldwide.

The European banks sector added more than 5 percent. UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) gained 8.9 percent, Santander (SAN.MC: Quote, Profile, Research, Stock Buzz) rose 8.7 percent and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) added 12.5 percent.

BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz) rose more than 8 percent after saying nine-month recurrent net profit rose 9.1 pct to 4.321 billion euros from 3.962 billion, compared with 4.18 billion forecast in Reuters poll.

Wall Street marked its second-best day ever on Tuesday, with major U.S. stock indexes surging about 10 percent.

The U.S. Federal Reserve is set to announce its rate verdict at 1815 GMT. In a Reuters survey, primary dealers expected the Fed funds rate will be cut to 1 percent from 1.5 percent.

"The Fed doesn't have too many more rate cuts left at its disposal but there is still scope for them to ease further," said Darren Winder, an equity strategist at Cazenove.

"The market should be able to rally on from that," he added. "We are due a significant rally from the levels we've got down to."

Japan could follow the United States in cutting interest rates this week, a source with knowledge on the matter said. Tokyo's Nikkei average .N225 soared 7.7 percent.

Oil and gas producers boosted the market, with BP (BP.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz) gaining 3.4 and 4 percent respectively, and Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) up 7 percent as U.S. crude oil rallied 2.5 percent.

VW DROPS, PORSCHE SOARS

Volkswagen (VOWG.DE: Quote, Profile, Research, Stock Buzz), Europe's biggest faller, dived 44 percent after main Porsche (PSHG_p.DE: Quote, Profile, Research, Stock Buzz) took steps to ease a squeeze on short-sellers that more than quadrupled the stock in days and briefly made it the world's most valuable company. Deutsche Boerse meanwhile said will cut the weighting of shares in the blue-chip German DAX index .GDAXI.

Porsche, Europe's top gainer, leapt about 36 percent.

Around Europe, Britain's FTSE 100 .FTSE added 3.5 percent, Germany's DAX .GDAXI fell 3.5 percent, weighed by the losses in heavyweight Volkswagen, and France's CAC .FCHI rose 5 percent.

Topping the FTSE 100, shares in Old Mutual soared 22.6 percent, bouncing back after falling on Tuesday on U.S. economic concerns.

Bayer (BAYG.DE: Quote, Profile, Research, Stock Buzz) added 8.3 percent after it stood by its full-year guidance on Wednesday, defying a slump at its plastics and foams unit and citing strong demand for its prescription drugs and its pharming pesticides.

EADS (EAD.PA: Quote, Profile, Research, Stock Buzz) rose 6.1 percent after Louis Gallois, chief executive of the French European aerospace group, on Tuesday said its aircraft maker Airbus had not seen a wave of cancellations due to the global financial crisis. [ID:nLS560828]

On the downside, Norwegian telecoms group Telenor (TEL.OL: Quote, Profile, Research, Stock Buzz) sank 14.5 percent after reporting a bigger fall than expected in third-quarter core earnings and saying it would buy 60 percent of Indian operator Unitech Wireless for $1.07 billion. Telenor also kept its outlook for 2008, it said. [ID:nOSN001662] (Editing by Quentin Bryar)