European Markets Stage Comeback to End Dismal Week

European shares staged a late rally on Friday following a dismal week, helped by hopes of further measures from the European Central Bank to ease the region's debt crisis, while French banks recovered strongly.

BNP Paribas surged 9.8 percent and Societe Generale soared 8.8 percent, with traders citing market talk of help from the French government with some form of capital injection to bolster the banks' balance sheets.

Spokeswomen for SocGen and BNP declined to comment.

The FTSEurofirst 300 index of top European shares ended 0.8 percent higher at 882.18 points in a choppy session during which it hit a 26-month low.

The index posted a weekly loss of 5.9 percent, its third worst weekly performance in 16 months.

"The market has had a terrible week, and this is all happening while there's a short-selling ban on financials," Derek Lawless, head of WorldSpreads France, said.

"There's an underlying feeling that something isn't right in the financial system, that politicians aren't telling the truth. We know what happened when a bank went bust, but we have no idea what's going to be when an European state goes bust."

Earlier in the session, stocks tumbled -- with the euro zone's blue chip Euro STOXX 50 index falling by as much as 3 percent and hitting a level not seen since the heat of the financial crisis in March 2009 -- as a pledge of support from the G20 nations to shore up the financial sector failed to reassure investors.

Adding to the gloom were comments from Deutsche Bank suggesting European lenders could face a bigger-than-expected writedown on their Greek debt holdings, while talk of a Greek default intensified.

"The market is extremely overbought on the short term, and we could see a technical rebound, but it won't last. We're in a bear market," Lawless said.

Despite Friday's rally, the Euro STOXX 50 volatility index , Europe's fear gauge known as the VSTOXX, rose 1.6 percent to close at 48.5.

The VSTOXX surged 13 percent on the week, and its chart shows the formation of an ascending triangle over the past few weeks, a chart pattern signalling that the volatility index, a barometer of investor anxiety, could soon spike above 56.

In other asset classes, the euro inched higher while conditions improved in some parts of the short-term rates markets, helped by market speculation that the ECB would take additional steps to help struggling euro zone countries and banks.

Despite Friday's rally, shares of both BNP Paribas and Societe Generale remained in medium-term downward channels, although recent divergence between trends in prices and the stocks' relative strength indexes signal potential further gains in the short term.