Europe's Markets Rise Friday in Light, Pre-Holiday Trading

(Reuters) - European stocks rose to their highest in two weeks on Friday, tracking Wall Street gains as the world's biggest economy showed further signs of recovery, especially in the labor market.

However, volume was thin on the last session before Christmas and strategists warned against reading too much into movements in share prices.

At 1143 GMT, the FTSEurofirst 300 index of top European shares was up 0.9 percent at 991.07 points, the highest since Dec. 8, but volume was just 17 percent of the index's 90-day average, with the London Stock Exchange only trading for half a day.

A drop in U.S. weekly claims for jobless benefits to a 3-1/2-year low as well as improvement in U.S. consumer sentiment in December boosted U.S. stocks on Thursday, with the S&P 500 just about the turn positive on the year.

The jobless numbers looked good but so many seasonal staff get hired at Christmas. It's not a strong support on which to build a bullish case, said Andy Lynch, fund manager at Schroders, which manages 197 billion pounds ($307 billion).

I would read very little into what's going on until everyone's back in January, he said

Oil stocks were among the gainers, as crude held around $108 a barrel, supported by the signs of a strengthening U.S. economy and concern of potential supply disruptions in Iran and Iraq.

French heavyweight Total rose 2.5 percent and BP rose 1.7 percent.

The STOXX Europe 600 Oil & Gas Index rose 1.1 percent, taking it into positive territory for 2011.

It has outperformed the wider pan-European index, which is on track to end the year down nearly 12 percent.

Investors have fled riskier assets on worries the euro zone debt crisis could lead to massive defaults and push the region's economy into another recession.

But Lynch said European shares might gain between 5 and 10 percent in 2012.

Everyone has been so depressed after 2011. There may be upside surprises in earnings, he said.

Aloca kicks off U.S. fourth-quarter earnings season, on Jan. 9.

BANKS GAIN

Banks gained ground, extending a recent rally helped by the European Central Bank providing cheap liquidity. Credit Agricole rose 1.7 percent.

But the STOXX Europe 600 Banking Index is down more than 32 percent in 2011, with several banks suffering writedowns on exposure to euro zone peripheral debt.

Defensive sectors, such as healthcare, up 10 percent in 2011, have performed better.

The macro data from the U.S. is helping us forget about the debt crisis, but that shouldn't last very long, and there's still a big risk of getting a few credit downgrades in Europe before the end of the year, a Paris-based trader said.

Investors were relieved after the passage late on Thursday by Italy's Senate of a vote of confidence in the government of Prime Minister Mario Monti that put the final seal on an austerity budget aimed at restoring market confidence in the euro zone's third largest economy.

The cornerstone of Monti's plan to reduce the debt is to limit payments in cash to curb tax evasion which, if successfully implemented, could be the turning point for Italy's finances, Spreadex trader Jordan Lambert said.

The feeling is that if Monti can continue this progress the market may no longer view Italy as a threat to crumbling the euro and in conjunction with the huge injection of liquidity by the ECB, the bank recapitalizations and the increased transparency of government deficits, we could be witnessing the beginnings of an end to the euro crisis.

Despite attractive equity valuation levels, investors have been reluctant to buy stocks ahead of crucial tests in the bond market in first quarter of 2012. According to the ECB, some 230 billion euros of bank bonds and 250 billion to 300 billion euros in government bonds are falling due during the quarter.

(Additional reporting by Reuters Staff Writer Blaise Robinson.)

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