European shares add to rally; ECB briefing awaited

European shares gained ground on Thursday with investors scooping up battered banking stock as details of the sector's stress tests started to emerge, adding to a tentative recovery from a sharp two-week sell-off.

The European Central Bank and the Bank of England both held interest rates on hold, as widely expected, leaving investors to wait for a briefing by ECB President Jean-Claude Trichet, due to start at 1230 GMT.

Trichet will face pressure to say if the central bank was worried by rising bank-to-bank lending rates, whether it will extend liquidity support, and how it sees Europe's bank stress tests panning out.

The market hopes for a smooth briefing, with no negative news that could halt the little recovery we just had. But I doubt it could really propel stocks much higher. The bounce is done now, said David Thebault, head of quantitative sales trading, at Global Equities.

At 1200 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 0.7 percent at 1,012.52 points, gaining ground for the third session in a row.

The Euro STOXX 50 .STOXX50E was up 0.7 percent at 2,652.76 points, rising toward a key resistance level at 2,669.29, the 38.2 percent retracement level of the index's move to a May low from an April high.

Sentiment also improved after Wall Street's S&P 500 .SPX surged on Wednesday and closed above 1,040 points, seen as a major resistance level.

We are getting bits and pieces on the stress tests, officially or from anonymous sources talking to the media, but the bottom line is the whole thing is getting more transparent, Thebault said.

We are not sure yet how tough the tests will be in pricing in potential haircuts, but anyway the market is already pricing in the risks of haircuts and liquidity risks.

The Committee of European Banking Supervisors, conducting the tests, said on Wednesday 91 banks across Europe were taking part, including many regional banks seen as the weakest.

However, the committee fell short of detailing exactly was included in the tests in terms of potential haircuts on sovereign debt in the euro zone.

We have the ECB and bank stress tests coming up and investors are buying on hope they will not come out with bad news, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

When the market has been oversold and you are faced with an event which you are not sure about it is wise to buy the market as you could be sitting on a nice profit.

Banking stocks, which feature among the worst performers so far this year, rallied strongly with Natixis (CNAT.PA) gaining 4 percent, Dexia (DEXI.BR) up 3.6 percent and Deutsche Bank (DBKGn.DE) up 2.2 percent.

Europe's STOXX banking index .SX7P, up 1.4 percent on Thursday, was still down 13 percent since mid-April when fears Greece's debt crisis could spread to other euro zone countries and derail the region's economic recovery intensified.

Also boosting the battered sector on Thursday, Credit Suisse raised its weighting on banks to benchmark from 10 percent underweight, citing a better macroeconomic environment, attractive valuations and taxation and regulation plans being watered down.

According to Thomson Reuters data, European banks trade at 10.6 times expected earnings, while the broad STOXX 600 index .STOXX trades at 11.2 times expected earnings.

Positive news also came from economic data, with numbers showing a stronger-than-expected rise in German industrial production in May, helped by a jump in manufacturing output.

Around Europe, Britain's FTSE 100 index .FTSE gained 1.4 percent, Germany's DAX index .GDAXI rose 0.5 percent, and France's CAC 40 .FCHI added 1.3 percent.

(Reporting by Blaise Robinson; Editing by Dan Lalor)