European shares rose on Wednesday in a low volume rally with investor sentiment boosted by a halving of short-term debt costs at an auction in Italy, improving confidence about demand for Thursday's Italian long-term bond sale.

Italian bank Intesa Sanpaolo, whose movements are highly correlated to bond yields, became one of the best performers, up 3 percent after the auction, while Italy's FTSE MIB rose 1.2 percent also making it a standout gainer.

The Italian short-term debt sale helped ease investor worries that thin liquidity would make Thursday's sale of up to 8.5 billion euros of longer-term Italian bonds difficult.

The market continued to gain after the auction, with a new austerity package and cheap long-term liquidity from the European Central Bank also lifting investor sentiment, analysts said.

"There is a slightly better supportive tone to the bond markets in the euro zone and I should expect tomorrow's auction should be favourable," Mike Lenhoff, chief strategist at Brewin Dolphin, said.

"Italy has been directing itself towards getting austerity measures in place which has been improving sentiment and the ECB cheap money to banks is a plus as it can be used to support the market."

But 10-year Italian bond yields still remain at high levels and dangerously close to the 7 percent level, roughly the threshold beyond which other euro zone governments have been forced to seek bailouts.

Markets are likely to get increasingly nervous if yields stay above it for a prolonged period when trading picks up early next year.

By 1136 GMT, the pan-European FTSEurofirst 300 index of top shares was up 0.5 percent at 995.45 points after being as low as 985.31.