European share indexes rose about half a percent on Thursday, led by banking stocks on speculation that Royal Bank of Scotland may bid for Dutch peer ABN AMRO, while a firmer dollar lifted exporters.
A 1 percent fall in crude oil prices and indications that Wall Street will open higher also put a spring in investors' steps.
ABN rose 2.6 percent to 20.29 euros after Sandford Bernstein said RBS may be tempted to bid around 25 euros a share for ABN. RBS shares were 0.4 percent firmer at 1,760 pence.
By 1201 GMT, the FTSEurofirst 300 index was up 0.5 percent at 1,048.8 points, leaving it only about 3 points below this month's 2-1/2 year high.
Dealings were lighter than usual as some Continental European markets were shut for Epiphany. The DJ Euro Stoxx 50 index rose 0.6 percent to 2,965.5 points.
"January is always an interesting month, and people who look at trends will be looking at the seasonal phenomena, the 'January effect'," said Stuart Fraser, investment director at Standard Life.
"We still need to pay attention to what happens on Wall Street for direction," he added, dismissing the argument that Europe could "de-couple" from U.S. markets this year.
"You can never de-couple direction. We could outperform, but I don't believe Europe will de-couple direction."
U.S. stock futures were pointing to a firmer open on Wall Street after a lacklustre start to the year across the Atlantic.
AUTOS IN FAVOUR
Broker upgrades, encouraging sales, and a firmer dollar sent auto-related groups higher, with the DJ Stoxx European auto sector index up 1.1 percent.
"Autos are doing well, though the bulk of this is due to tyre companies. Autos are also benefiting from the U.S. dollar, which has been quite strong in the last couple of days," said a member of Deutsche Bank's European equity focus team.
The auto sector is a major exporter to the United States, where the dollar's recent decline to new lows against the euro makes European cars less competitive.
But the greenback's recovery, partly on expectations that U.S. interest rates will rise next month, eased such concerns, though other news was also helping the sector.
Shares in German tyremaker Continental and French peer Michelin rose after Merrill Lynch started coverage on Continental with a "buy" rating and also rated Michelin a "buy", according to dealers.
Continental rose 1.1 percent, while Michelin gained 1.8 percent.
Meanwhile, French carmaker Renault posted a 4.2 percent rise in global sales last year, sending its shares up 1.4 percent.
And German rival Volkswagen rose 2.6 percent after saying it would not stop trying to shave billions of euros off its cost base just because its efficiency programme will be completed by the end of 2005.
AEROSPACE FIRMS FLY
Shares in aerospace companies Rolls-Royce, BAE Systems and EADS all rose by around 3 percent, with dealers citing a positive sector note from broker Cazenove.
Markets are looking for guidance from Friday's U.S. employment report for December, a major indicator ahead of the Federal Reserve's interest rate setting committee meeting in early February.
However, some economists say the jobs report may be losing some of its influence on market sentiment as the Fed starts to focus more closely on other aspects of the economy, such as the U.S. current account deficit.