European stocks hit their highest close since early August on Monday, with euro zone banks gaining sharply following a report that France and Germany were calling for a relaxation of global bank capital rules to prevent a credit crunch.

The STOXX Europe 600 Euro Zone Banking Index <.SX7E> rose 3.7 percent.

The FTSEurofirst 300 <.FTEU3> index of top European shares rose 0.4 percent to end the day provisionally at 1,047.65 points, the highest close in more than five months. The benchmark's 14-day Relative Strength Index was nearing 70, considered in technical terms to be overbought territory.

The Financial Times said French finance minister Francois Baroin and his German counterpart Wolfgang Schaeuble will say elements of Basel III guidelines on capital requirements should be watered down to mitigate any negative effect on growth.

Schaeuble denied the FT story, telling journalists in Paris that the two countries would implement Basel III rules.

The regulators now realise that with a price-to-book value of less than 0.4 it was uneconomic for the banks to go out en masse and raise equity capital, said Bob Parker, senior adviser at Credit Suisse.

But Parker said he was still cautious on European banks. There are still a lot of risks out there in terms of potential

debt writeoffs in a recessionary environment in Europe.

(Reporting by Brian Gorman)