* FTSEurofirst 300 up 1 pct; snaps 7-day losing streak
* Index drops 7.3 percent on the week, down 3.4 pct in 2009
* Recently-hammered mining and oil shares rally
* Banks sag in late-trading selloff; Barclays plunges 25 pct
By Blaise Robinson
PARIS, Jan 16 (Reuters) - European shares rallied on Friday
to end a seven-session losing run, led by recently-hit mining
and oil shares such as Xstrata <XTA.L>, capping a dismal week
marked by the return of fears over the stricken banking sector.
But stocks trimmed their gains in late trading as a number
of banks, including Barclays <BARC.L> and Royal Bank of Scotland
<RBS.L>, tumbled on fresh worries over their balance sheets.
Barclays plummeted 25 percent and Royal Bank of Scotland
<RBS.L> sank 13 percent.
The FTSEurofirst 300 <> index of top European shares
ended 1 percent higher at 803.90 points. The index slid 7.3
percent on the week.
Commodity-related shares were among the biggest gainers,
with Xstrata adding 6 percent, Total <TOTF.PA> rising 1.1
percent and Rio Tinto <RIO.L> advancing 7.6 percent.
Shares in the banking sector <.SX7P> surrendered early gains
and slipped into the negative territory as news that Bank of
America <BAC.N> received a $20 billion government capital
infusion could not eclipse rekindled fears over the health of
the beleaguered financial institutions.
Commerzbank <CBKG.DE> lost 7.9 percent, BNP Paribas
<BNPP.PA> shed 3.2 percent and Deutsche Bank <DBKGn.DE> dropped
3.6 percent.
Irish banks also got hammered after Ireland nationalised
beleaguered Anglo Irish Bank <ANGL.I> amid fears it could
collapse. Allied Irish Banks <ALBK.I> dropped 25 percent and
Bank of Ireland <BKIR.I> sank 17 percent.
"There will be more banks going into public ownership, that
has to happen," said Gary Dugan, CIO of Merrill Lynch Wealth
Management for Europe, Middle East and Africa.
DEFLATION LOOMING
Fears of deflation were heightened on Friday by data showing
U.S. inflation slowed to a half-century low in 2008 as the
economic slowdown deepened toward year-end.
"The looming deflation in developed economies is a reminder
that in such a situation, allowing a temporary spike in
inflation would be less painful than deflation, which would be
economically and socially devastating," said Marc Touati, chief
economist at Global Equities, in Paris.
Investors worry that declining prices could spark a
prolonged vicious spiral of shrinking corporate profits as well
as falling employment and personal incomes, while triggering a
rise in defaults on loans.
"Deflation doesn't go away quickly. We'll likely be fighting
deflation in the next two to three years," warned Merrill
Lynch's Dugan.
After a brief tick up in the first few sessions of the year,
the FTSEurofirst 300 is now down 3.4 percent in 2009, following
a 45 percent plunge last year, hit by the global credit crisis
that tipped the world economy into a sharp downturn.
The DJ Stoxx banking index <.SX7P> has lost 9.7 percent so
far this year. It tumbled 65 percent in 2008, knocked down by
the financial crisis that began with U.S. mortgage defaults in
2007 and has now plunged major economies into recession,
reshaped the banking landscape and taken entire countries to the
brink of bankruptcy.
Around Europe, UK's FTSE 100 index <> gained 0.6
percent, Germany's DAX index <> rose 0.7 percent, and
France's CAC 40 <> added 0.7 percent.
On the upside, HeidelbergCement <HEIG.DE> soared 9.5
percent. Sources familiar with the matter said U.S. private
equity firm TPG [] was considering taking a stake in the
German cement maker, jointly with Goldman Sachs <GS.N>.
(Reporting by Blaise Robinson; Editing by Rupert Winchester)
