* Fillon stays in presidential race despite legal probe
* Move seen strengthening position of centrist Macron
* French stocks hit 15-month high
* French/German yield gap tightest in a month
* Decision Europe: Full election coverage cpurl://apps.cp./cms/?navid=72745
By Dhara Ranasinghe and Danilo Masoni
LONDON, March 1 The premium investors demand for
holding French over German bonds shrank to a one-month low on
Wednesday, while French stocks climbed to a 15-month high after
scandal-hit French presidential candidate Francois Fillon vowed
to stay in the election fight.
Analysts said the move should strengthen the position of
favourite Emmanuel Macron, an independent centrist candidate.
French bonds gyrated after a morning of speculation that Fillon
was about to withdraw from the campaign over allegations of
misuse of public funds, which he denies.
Fillon said on Wednesday he would remain in the French
election race despite a judicial summons.
Fillon and Macron are both seen likely to beat far-right
National Front leader Marine Le Pen, whichever one faces her in
the May runoff, so Fillon's decision to stay in the race is
reassuring, a trader at a European bank said.
Le Pen concerns many in financial markest because of her
desire to pull France out of the euro zone.
Opinion polls show Macron consolidating his status as
"The word from Fillon is that he soldiers on regardless and
that leaves Macron as the candidate most likely to win," said
Societe Generale strategist Ciaran O'Hagan.
France's 10-year government bond yield was up around 2 basis
points on the day at 0.91 percent, but closed the
gap on German equivalents which rose 8 bps to 0.28 percent.
Euro zone bond yields rose broadly on Wednesday in keeping
with U.S. equivalents as Federal Reserve officials jolted the
markets into higher expectations for an interest rate hike in
the world's largest economy next month.
But amid that sell-off, the gap between French and German
yields, a barometer of how investors view relative risks, was
the narrowest in one-month at 64 basis points. That is down from
84 bps last week and the widest level since late 2012.
French stocks meanwhile extended their gains after Fillon's
statement, with the benchmark stock index up over 2 percent at
around 4,960 points - the highest level since December 2015.
Shares of the biggest French banks were up more than 3
percent and were among the best performers on the blue chip CAC
40 index. Societe Generale was up nearly 5
percent while BNP Paribas was up 4.5 percent.
In another twist, former agriculture minister Bruno Le Maire
said he would resign from Fillon's campaign team over his vow to
stay in the race despite the summons.
Fillon's campaign has been dogged since late January by an
official investigation into alleged misuse of taxpayers' money
involving hundreds of thousands of euros paid to his wife and
family. He denies wrongdoing.
French bonds have taken a beating since the start of the
year on fears about the popularity of the far right's, anti-euro
Le Pen in the presidential race.
But over the past week, Macron has gained ground in the
polls, boosted by an alliance with centrist Francois Bayrou.
The euro was down against a broadly stronger dollar,
showing little immediate reaction to developments in France.
(Editing by Jeremy Gaunt)