European shares resumed their recent rally on Wednesday, adding to gains of more than 11 percent since late November, on growing optimism that European leaders will agree on bold measures to resolve the region's debt crisis at a crucial summit this week.

French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to propose a plan to impose mandatory penalties on euro zone states that exceed deficit targets, with the aim of preventing the two-year old debt crisis spiralling out of control.

At 8:02 a.m., the FTSEurofirst 300 <.FTEU3> index of top European shares was up 1 percent at 999.64 points. The index fell 0.4 percent in light trading on Tuesday and is still down nearly 11 percent so far this year.

Investors are pinning a lot on this summit. Those hopes that Europe will be able to piece a deal together are still growing. They will be doing their best to try and avoid individual referendums across the zone, but that possibility remains and could provide some hurdles, Keith Bowman, equity analyst at Hargreaves Lansdown, said.

The market has tried to price in a positive outcome, but there is room for further upside if we were to see some reasonably concrete action.

Banks, many of which have a significant exposure to peripheral euro zone debt and have suffered badly this year, were the top gainers. The sector index <.SX7P> was 1.7 percent higher, while BNP Paribas rose 4.1 percent.

(Reporting by Atul Prakash)