By SARAH TURNER
LONDON (AP) _ European shares rallied Monday as financials made strong gains on deal talk and hopes for a bailout of troubled bond insurer Ambac Financial.
The pan-European Dow Jones Stoxx 600 index rose 1.7 percent to 325.30, with banks and insurers in the lead.
"Financials are pushing the market higher. The underlying tone of the market has been improving in certain places, and valuations will make some of the financials look attractive," said Mike Lenhoff, chief strategist at Brewin Dolphin Stockbrokers.
The British FTSE 100 index closed up 1.9 percent at 5,999.50, the German DAX 30 blue-chip index advanced 1.1 percent to 6,882.56 and the French CAC-40 index climbed 2 percent to 4,919.26.
Shares on Wall Street pulled solidly higher in early trading in New York after data on the troubled housing industry proved slightly less bleak than predicted.
Financials in Europe were lifted by a report that a group of banks may recapitalize struggling bond insurer Ambac Financial Group in a bid to save its crucial AAA rating.
Dexia, the owner of U.S. bond insurer FSA, rose 3.6 percent in Belgium. "Concerns over the U.S. monoline bond insurance industry have weighed heavily on Dexia's shares," said Citigroup analysts in a note ahead of Dexia's earnings on Friday.
Other banking-sector standouts included U.K. mortgage lenders Bradford & Bingley, up 6.2 percent and Alliance & Leicester, up 8.8 percent.
Both recently reported disappointing earnings, prompting sharp losses for the shares and potentially making them more vulnerable to potential bidders. Over the weekend, The Sunday Telegraph reported Lloyds TSB could be looking at buying one or the other.
Lloyds TSB shares rose a further 2 percent, extending gains made Friday after the bank lifted its dividend 5 percent as analysts continued to assess its results.
"Lloyds TSB has delivered a strong performance in 2007, both in terms of earnings and the scale of credit market write-downs," noted the Citigroup analysts.
Meanwhile, Royal Bank of Scotland shares rose 5 percent ahead of its results Thursday, as U.K. media outlets speculated it, too, will lift its dividend.
"If Barclays and Lloyds TSB are indicative for Royal Bank of Scotland and HBOS, then we know it will be a satisfactory outcome," Lenhoff said.
Shares in German reinsurance giant Munich Re rose 1.6 percent. The company's closely watched operating profit rose 29.2 percent to euro1.1 billion (US$1.63 billion) in the fourth quarter on what it called a "rigorous approach in integrated risk management and our healthy skepticism towards what are often poorly rewarded credit risks." Munich Re will raise its dividend 22 percent to euro5.50 (US$8.15) a share.
Shares in Swiss drug maker Roche advanced 4.5 percent. Roche's biotech unit, Genentech Inc., said Friday that the U.S. Food and Drug Administration has approved its oncology drug Avastin for the additional use of treating advanced breast cancer, a move that had been eagerly anticipated by investors.
"This is contrary to our, and consensus, expectations following the negative FDA advisory committee vote (5-4 against approval) and should therefore could see forecasts raised as U.S. Avastin breast cancer sales are re-introduced and a sentiment overhang removed," analysts at Merrill Lynch said.
Meanwhile, shares in National Grid underperformed in London, up just 0.6 percent.
The U.K. energy regulator, Ofgem, said it has fined the gas and electricity distributor 41.6 million pounds (US$81.8 million) for restricting competition in the domestic gas metering market.
Shares in another utility, EdF, fell 3 percent as the company's CEO said in a radio interview that the firm was interested in entering the Spanish and Belgium market and dismissed opposition to a takeover by Iberdrola's chairman.
Autos got a lift from broker action after Lehman Brothers initiated the European autos sector at overweight. The broker added Peugeot, Renault and Daimler to its European recommended portfolio.
Peugeot shares rose 2.2 percent, Renault shares advanced 2 percent and Daimler shares climbed 0.8 percent.
Sarah Turner is a correspondent for Dow Jones Newswires.
By SARAH TURNER