Bank optimism helps Europe shares to extend rally

By Ana Nicolaci da Costa

LONDON, April 2 (Reuters) - European stocks rallied on Wednesday as hopes that subprime-related losses were coming to an end offset the impact of comments on the economy from the Federal Reserve Chairman.

Fed chief Ben Bernanke said the U.S. economy could contract in the first half of this year, supporting suspicions of many that it might already be in recession, and unemployment would move higher.

Despite the bleak outlook, the FTSEurofirst 300 index closed up 1.2 percent at 1,317.84 points, a five-week closing high.

Rather than fuelling concerns about the fallout from the credit crisis, a $19 billion writedown by Swiss bank UBS (UBSN.VX: Quote, Profile, Research) in the previous session raised hopes that banks were aggressively cleaning up their books.

This made banks the top performers for the second day running, with UBS was up 4.9 percent, Credit Suisse (CSGN.VX: Quote, Profile, Research) 5.8 percent higher, and Commerzbank (CBKG.DE: Quote, Profile, Research) rising 6.1 percent.

Analysts said people had long wanted banks to recapitalise and that UBS's writedown represented a willingness to do just that, making it a welcome relief.

"The immediate reaction to that has been positive because it puts banks in a stronger financial position than they were in previously," said Darren Winder, equity strategist at Cazenove.

"And the positive share price reaction I think is leading investors to speculate whether the same could be expected with other banks."