Oil sector buoys Europe shares, banks curb gains

                                
 By Amanda Cooper
                                
 LONDON, May 29 (Reuters) - European shares rose on Thursday,
driven by a rally in energy stocks as the price of crude oil
held firm, while gains in the broader markets were tempered by
new worries about the banking sector.
                                
 German utility E.ON <EONG.DE> was the largest individual
positive influence on the broader market, rising 2.8 percent.
Oil majors BP <BP.L> and Total <TOTF.PA> followed closely
behind, rising 1.2-1.5 percent. Crude oil futures <CLc1> fell
below $130 after European market hours.
                                
 Data confirming the U.S. economy grew faster than originally
reported in the first quarter dragged the European market out of
negative territory as the figures helped soothe concern about
the outlook for the world's largest economy.
                                
 The FTSEurofirst 300 index <.FTEU3> of top European shares
ended 0.3 percent higher at 1,330.28 points, having swung
earlier between a loss of 0.2 percent and a gain of 0.8 percent.
                                
 Yet a rise in euro zone government bond yields <EU10YT=RR>
to their highest level since the onset of the credit crunch in
July last year was not supportive for equities, as this mirrored
concern in the investment community about the outlook for
inflation, rather than the prospect of robust economic growth.
                                
 "My opinion is the market is saying the economy is not in
great shape, we've got a lot of cost-push inflation from oil and
soft commodities and I think if that interpretation is right,
then that is pretty bad news for the equity markets," Andrew
Lynch, a portfolio manager at Schroders, said.
                                
 
                                
 UTILITIES RALLY
                                
 The utilities sector benefited from a UBS price target
upgrade for E.ON, market talk of private-equity interest for RWE
<RWEG.DE>, which rose by as much as 3.3 percent at one point,
and France's Suez <LYOE.PA> selling its controlling stake in
Belgian gas group Distrigas to Italy's ENI <ENI.MI>.
                                
 Suez's sale of the Distrigas stake effectively removed one
of the last remaining hurdles to its proposed merger with rival
Gaz de France <GAZ.PA>. Suez shares rose nearly 2.7 percent.
                                
 Pharmaceutical stocks led by Switzerland's Novartis
<NOVN.VX>, which rose 2.1 percent, were among top gainers.
                                
 "There's nothing in the winners and losers page that makes
me feel the market is feeling particularly happy about life, so
the things that are going up are the defensive stocks," Lynch
said.
                                
 The mining sector rallied after an upbeat production outlook
from Rio Tinto <RIO.L>, whose shares rose 0.7 percent, and
Xstrata <XTA.L>, which rose 0.6 percent and BHP Billiton <BLT.L>
which gained 0.1 percent.
                                
 Banks were once again the biggest drag on the FTSEurofirst
300, led largely by Royal Bank of Scotland <RBS.L>. Shares in
RBS fell as much as 6.1 percent at one point to an eight-year
low on concern in the market that its planned rights issue may
encounter problems. RBS declined to comment.
                                
 Barclays <BARC.L> fell 2.5 percent, while Credit Agricole
<CAGR.PA> lost 3.8 percent and Societe Generale <SOGN.PA> fell
1.3 percent.
                                
 The banking sector has fallen by 20 percent this year as
banks have notched up multi-billion dollar writedowns on
products linked to the slumping U.S. housing market. The
FTSEurofirst 300 is on track for a 0.5 percent fall this month,
and is still down 12 percent this year.
                                
 Despite the two-session rally, Gerhard Schwarz, strategist
at HVB/UniCredit, said downward revisions in consensus earnings
estimates will continue and this will weigh on stocks.
                                
 "Even though the deterioration in the global leading
indicators has been very gradual thus far, we think the risk of
further share price setbacks throughout the year is still
intact," Schwarz wrote in a note.
                                
 German chipmaker Infineon <IFXGn.DE> tumbled 11 percent
after warning it expects a bigger operating loss and flat sales
at its Communication Solutions unit.
                                
 This hit the wider technology sector, pulling down shares in
Nokia <NOK1V.HE> by 1.4 percent, Alcatel-Lucent <ALUA.PA> by 1.1
percent and Dassault System <DAST.PA> by 0.5 percent.
                                
 Germany's DAX index <.GDAXI> rose 0.3 percent, Britain's
FTSE 100 index <.FTSE> was flat and France's CAC 40 <.FCHI> was
up 0.1 percent.
                                
 (Additional reporting by Blaise Robinson in Paris; editing
by Sue Thomas)