European shares rose Thursday, recovering some of the ground lost in a heavy sell-off in the previous session on a spike in Italy's borrowing costs, with signs of new governments being formed in Italy and Greece, inspiring hopes of some stability.

Italian shares rose, as the country's bond yields came off record highs, with the European Central Bank providing buying support. Italy's benchmark <.FTMIB> was up 2.2 percent, with UniCredit (CRDI.MI), heavily exposed to sovereign debt, up 4.9 percent.

An Italian short-term bill auction on Thursday placed the full 5 billion euros, though yields were the highest since 1997.

Former European Commissioner Mario Monti emerged on Thursday as favorite to replace Silvio Berlusconi and form a new government to stave off a run on Italian bonds that is endangering the entire euro zone.

Greek bank stocks <.FTATBNK> surged 7.9 percent on hopes that former ECB vice-president Lucas Papademos may be appointed as head of a new coalition government.

Investors hope new governments can quickly set out, and enact, austerity measures.

The fundamentals are out of the window now. It's all politics. Austerity measures would help in the long term, but not in the sort term, because austerity means your economy shrinks. You can't have pain-free austerity, said Andy Lynch, fund manager at Schroders, which manages 197 billion pounds ($314 billion).

At 1008 GMT (5:08 a.m. ET), the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.6 percent at 972.29 points, after falling 1.8 percent in the previous session when bond yields in Italy surged as margin calls on Italian paper were raised.

However, the pan-European index is in danger of dropping through key technical levels after Wednesday's fall.

What we should be watching for now is whether this index is able to hold above its 50-day moving average. That line currently stands at 946 or so and a break back below it would deal a serious blow to the sentiment, said Bill McNamara, technical analyst at Charles Stanley.

(Editing by Jane Merriman)

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