* FTSEurofirst 300 up 0.7 pct
* Index pares gains after ECB holds rates unchanged
* Banks buoyed by passage of rescue plan, UBS profit
By Sarah Marsh
FRANKFURT, Oct 2 (Reuters) - European shares were up at
midday on Thursday as banks climbed on hopes of a recovery after
the U.S. Senate passed a financial sector bailout plan and UBS
<UBSN.VX> said it would make a quarterly profit, while the
European Central Bank left rates unchanged.
At 1228 GMT the FTSEurofirst 300 <> index of top
European shares was up 0.7 percent at 1,080.50 points, having
earlier hit a peak of 1,090.25 points.
The ECB said it was leaving interest rates unchanged at 4.25
percent. The market focus then shifted to ECB President
Jean-Claude Trichet's news conference at 1230 GMT for his latest
take on whether the global financial turmoil has affected the
rate outlook and shifted focus away from inflation to economic
growth.
Stocks pared gains on the decision. Some analysts expect the
ECB to soften its hawkish tone and acknowledge the mounting
downside risks to Eurozone growth.
"In this difficult environment the equity market was
grasping for any straw and they were also looking to the ECB and
their decision to get some support from this side but
realistically the main issue is the U.S. bailout plan," said
Tammo Greetfeld, equity strategist at UniCredit in Munich.
"We had expected the ECB to hold off from cutting interest
rates ... until the first quarter of 2009," said Howard Archer,
Chief UK and European Economist at Global Insight, in a note
published before the decision.
"But the rapidly deteriorating Eurozone economic outlook ...
means that we are increasingly leaning towards the view that the
ECB will act before the end of this year."
Banking stocks were the top-weighted gainers on the index,
rising after the U.S Senate passed a $700 billion bailout plan
late on Wednesday.
Swiss bank UBS <UBSN.VX> rose 10 percent after it said it
would make a small profit in the third quarter following a year
of losses.
Across Europe, the FTSE 100 <> index was up 1.05
percent, Germany's DAX <> rose 0.11 percent and France's
CAC 40 <> added 0.44 percent.
MOST BANKS GAIN
HBOS <HBOS.L> soared 13.1 percent, Fortis <FOR.BR> gained 12
percent and Lloyds TSB <LLOY.L> rose 6.3 percent.
"Obviously there is some relief that the rescue package has
at least got through the early stages in Congress," said Henk
Potts, investment manager at Barclays Stockbrokers.
"Also, the banks are being driven by some more positive
comments coming from the likes of UBS ... perhaps suggesting we
are getting closer to turning a corner in relation to the
problems that the big banks have faced over the last year."
The revised legislation is aimed at reinvigorating worldwide
credit markets and interbank lending that has frozen while
overleveraged financial institutions staggered under the weight
of failed mortgages.
But market participants said that the rescue package was not
a cure-all, with a worsening economic outlook spurring calls for
central banks to cut interest rates.
Gloomy economic data continued to pour in. British house
prices fell 1.7 percent in September from August to post their
biggest annual drop since comparable records began in 1991, the
Nationwide building society said.
One of the main drags on the benchmark European index was
the automobiles sector <.SXAP>, falling 1.4 percent after
disappointing U.S. September sales data.
Shares in BMW <BMWG.DE>, Volkswagen <VOWG.DE>, Porsche
<PSHG_p.DE> and Renault <RENA.PA> were down between 1 and 4
percent.
(Additional reporting by Atul Prakash in London and Peter
Starck in Frankfurt; Editing by Greg Mahlich)
