European shares rose on Wednesday, helped by a boost to bank stocks from hopes of an agreement in Greek debt swap talks and better-than-expected Chinese manufacturing data.

Earnings, which have so far only given mixed results, were another focus, with Infineon rising 5.5 percent, near the top of the leaderboard after the German chipmaker reported forecast-beating results.

Banks, many of which have exposure to euro zone sovereign debt, featured among the best performers, with the STOXX Europe 600 Banks index up 2.4 percent.

Greek Finance Minister Evangelos Venizelos said talks between Greece and its private creditors were "one formal step away," with a deal needed to avoid a messy default which could have serious consequences for financial markets.

"It is reflection of how market participants are positioning themselves on announcements," said Veronika Pechlaner, a fund manager on the Ashburton European equity fund. "The good Chinese data is definitely helping the market."

"The market is thinking something is going to be agreed on Greece, but we do not know yet what they are going to say and how credible any announcement will be."

Italian banks were standout performers, with Intesa Sanpaolo and UniCredit rising 4.3 percent and 3.4 percent respectively after the Bank of Italy eased rules on hybrid debt buybacks which will help them boost their capital base.

Intesa was also buoyed after it become the first lender from the euro zone periphery to issue senior unsecured bonds since October, in another sign the European Central Bank's provision of three-year liquidity is helping unfreeze markets.

The banking index, which had a dismal 2011, has gained 12.1 percent this year, making it one of the best performing sectors. Banks were helped at the start of the year by the European Central Bank offering them cheap loans.

 

Pechlaner said she was underweight financials, though she has added to positions following the ECB initiative to offer banks cheap money.

At 1026 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 1.3 percent at 1,050.25 points after being as low as 1,036.92.

But the index remained stuck in a trading range as traders did not want to make long-term bets and were ready to take profits if the outcome in Greece was not favourable.

There were still worries Portugal could be next to require a second bailout, with its bond yields at elevated levels.

Support was seen at 1,022.29 points, the index's 50 percent Fibonacci retracement of its February to September 2011 sell-off, and 1,062.24, the 61.8 percent retracement of the same move.

"We are seeing investors putting money in the market for a short-term and are investing banks depending on the newsflow," said Joshua Raymond, Chief Market Strategist at City Index. "No-one wants to take overnight risk."

CARMAKERS GAIN

Also helping the market was the Chinese manufacturing data, with carmakers, which tend to do well when economic growth is strong, among the top performers after the Chinese data gave hope the country would avoid a hard landing.

The STOXX Europe 600 Automobiles & Parts index rose 2.3 percent to 320.82, with many companies in the index such as Daimler and BMW big exporters to China.

The index, however, is not expected to push past a major resistance level -- its 61.8 percent retracement level from its July to September 2011 sell-off at 322 -- with other recent data such as U.S. consumer confidence showing a recovery is fragile.

Purchasing managers indices showed the euro zone is still on track for a modest recession as its debt problems hit consumer and business confidence, although Germany was on track for a small expansion.

Investors will look later at the U.S. ISM manufacturing index and U.S. ADP National Employment figures for signs of growth in the economy.