European stocks rise; commodities, financials help

* FTSEurofirst rises 2.6 percent

* Commodity shares gain, track higher crude, metal prices

* Financial advance, interbank dollar borrowing cost falls

By Atul Prakash

LONDON, Oct 20 (Reuters) - European shares rose on Monday as commodity stocks tracked higher crude and metal prices and investors bought financial shares in the hope that the banking sector crisis may ease.

At 0912 GMT, the FTSEurofirst 300 index of top European shares was up 2.6 percent at 917.72 points. It gained 4.2 percent on Friday, but has lost 39 percent this year, hit by fears the credit crisis may trigger a global recession.

Energy shares added most points to the index as oil stocks gained, tracking crude that rose 2.5 percent on expectations that OPEC could cut output at an emergency meeting this week to lift prices that have lost more than 50 percent in three months.

BP (BP.L: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell (RDSa.AS: Quote, Profile, Research, Stock Buzz), gas producer BG Group (BG.L: Quote, Profile, Research, Stock Buzz) and Tullow Oil (TLW.L: Quote, Profile, Research, Stock Buzz) added between 3.2 and 8 percent.

But the focus remained on financials. European Central Bank President Jean-Claude Trichet pledged to do whatever it takes to restore confidence to financial markets. He told France's RTL radio on Sunday that the ECB was working very closely with the U.S. Federal Reserve to solve the financial crisis.

"There are signs of Libor easing a little bit, particularly in U.S. dollars. We expect to see quite a strong fall in U.S. dollar Libor rates today, which is helping banking stocks," said David Buik, partner at BGC Partners, referring to the London interbank offered rate.

The interbank cost of borrowing dollars fell again in Europe on Monday and dollar and euro interest rate swap spreads narrowed as dealers said banks were lending dollars to European banks on Friday rather than simply hoarding cash. [ID:nLK596503]

Bank-to-bank euro and sterling lending rates were also indicated lower, notably three-month sterling, coinciding with the Bank of England's announcement it will implement immediately reforms to its money market operations and bank lending facilities.

Several financial stocks were up. ING (ING.AS: Quote, Profile, Research, Stock Buzz) surged 22.8 percent after it became the latest European bank to seek government funding, agreeing to a 10 billion euro ($13.5 billion) Dutch cash injection as well as scrapping executive bonuses and its year-end dividend.

Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz) jumped 19 percent, Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) gained 3.7 percent, Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) rose 3.4 percent, Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) was up 3 percent and UniCredit (CRDI.MI: Quote, Profile, Research, Stock Buzz) was up 1.5 percent.

But Societe Generale (SOGN.PA: Quote, Profile, Research, Stock Buzz) dropped 9.7 percent and Dexia (DEXI.BR: Quote, Profile, Research, Stock Buzz) shed 4.8 percent.

Britain's FTSE 100 .FTSE index was up 1.6 percent, Germany's DAX .GDAXI rose 1 percent, and France's CAC .FCHI added 1.2 percent.

OUT OF WOODS?

Despite a recovery in equity markets, investors remained cautious. China's weaker-than-expected growth and South Korea's $130 billion financial bailout package also highlighted that no country was immune from the global crisis.

Germany's cabinet on Monday approved strict conditions for banks that make use of its 500 billion euro ($674 billion) rescue package, including limits on managers' salaries, bonuses and severance. [ID:nLJ241789]

"Whilst we are clearly not out of the woods yet, investors are looking for anything to hang their hats on," said Chris Hossain, senior sales manager at ODL Securities.

Governments around the world have pledged $3.3 trillion to remedy the worst financial crisis in decades.

Miners were up as copper and zinc edged higher, while precious metals prices also firmed. BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz), Vedanta Resources (VED.L: Quote, Profile, Research, Stock Buzz), Lonmin (LMI.L: Quote, Profile, Research, Stock Buzz), Kazakhmys (KAZ.L: Quote, Profile, Research, Stock Buzz), Xstrata (XTA.L: Quote, Profile, Research, Stock Buzz), Antofagasta (ANTO.L: Quote, Profile, Research, Stock Buzz) and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) rose between 0.1 and 6.8 percent.

Ericsson (ERICb.ST: Quote, Profile, Research, Stock Buzz), the world's biggest mobile network maker, rose 20.7 percent after it posted stronger-than-expected third-quarter earnings, benefiting from heavy network traffic and showing no sign yet of damage from the financial turmoil roiling world markets.

But French water and waste management group Veolia (VIE.PA: Quote, Profile, Research, Stock Buzz) fell 19 percent after it cut its outlook for its investments and operating cash flow in 2008 due to the economic slowdown.

Novartis AG's (NOVN.VX: Quote, Profile, Research, Stock Buzz) third-quarter net profit rose 32 percent to $2.08 billion, helped by strong sales of its top-selling blood pressure drug Diovan and just behind forecasts. But the company shares were down 2.3 percent. (Additional reporting by Joanne Frearson; Editing by Paul Bolding)