European shares recovered from a four-week low to trade flat by mid-session on Monday and a volatility index spiked up, indicating waning investor appetite for risk.

With gains for oils and miners offset by weakness in banks and drugmakers, the FTSEurofirst 300 .FTEU3 index of top European shares was level at 976.50 points at 1140 GMT after falling to 968.19.

It fell 2.1 percent on Friday, the biggest one-day slide in nearly four months.

The European benchmark is still up more than 51 percent from its lifetime low of March 9, as investors have become more confident on the prospects for economic recovery.

But some investors are worrying that the rally is not supported by clear evidence of economic recovery. Market participants are getting a bit more nervous now, said Gerhard Schwarz, head of global equity strategy at UniCredit, in Munich. You can see that from the volatility index. The VDAX-NEW volatility index .V1XI, a measure of investor risk appetite or aversion, hit a two-month high and was up 1.9 percent, adding to Friday's 14 percent jump.

The higher the index, which is based on sell and buy options on Frankfurt's top-30 stocks <0#.GDAXI>, the lower is investors' appetite for risky assets.

Some argue the economy has recovered with a 3.5 percent rise for U.S. GDP. But they also worry that central banks may start to pursue exit strategies, and withdraw stimulus. This would suggest it's more of a sentiment issue than a fundamental issue, Schwarz said.

We expect to see further confirmation this week that both corporate earnings and the economy are getting better.

Miners were among the top risers, as copper and gold prices increased. Anglo American (AAL.L), Antofagasta (ANTO.L), BHP Billiton (BLT.L), Rio Tinto (RIO.L), Vedanta (VED.L) and Xstrata (XTA.L) rose between 1.8 and 3.5 percent.

Oils gained with a rise in the crude price of more than 1 percent to $78 a barrel, helped by manufacturing data from China.

Index heavyweight BP (BP.L) rose 1.8 percent while Total (TOTF.PA), ENI (ENI.MI), and BG (BG.L) were up between 1.1 and 1.3 percent.


Banks were mostly lower, pressured to some extent by Sunday's bankruptcy filing by CIT Group Inc (CIT.N), a U.S. lender to hundreds of thousands of small and medium-sized businesses. 

Societe Generale (SOGN.PA), Nordea Bank (NDA.ST) and UBS (UBSN.VX) fell 0.7 to 3 percent.

Lloyds (LLOY.L) was down 2.6 percent. The Financial Times reported that the bank will attempt to raise 7.5 billion pounds ($12.3 billion) capital by offering existing bond holders the chance to exchange their bonds for riskier but higher yielding investments that could convert into equity. 

Part-nationalised Royal Bank of Scotland (RBS.L) fell 7 percent after the lender said EU authorities would order more disposals than it had expected in return for approval of state aid RBS received after coming close to collapse last year.

Over the weekend, the UK Government said it hoped to attract new players into the market to help its plans for RBS and Lloyds.

Across Europe, Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC-40 .FCHI were up between 0.2 and 0.6 percent.

Pharmaceutical shares were among top decliners, with Novartis (NOVN.VX) falling 0.9 percent on news that French drugmaker Sanofi-Aventis SA (SASY.PA) asked a U.S. federal court to block a Novartis unit from selling a generic version of its cancer drug in the United States because it infringes a patent.

GlaxoSmithKline (GSK.L), AstraZeneca (AZN.L) and Roche (ROG.VX) were down between 1 and 1.3 percent.

Macroeconomic news gave support to the market with China's manufacturing sector expanding at its fastest pace in 18 months in October. 

The euro zone manufacturing sector also expanded for the first time in 17 months during October as new orders reached a level not seen in over two years. 

Later in the session, investors' attention will switch to the United States, where data is due om pending home sales, and the Institute of Supply Management's Manufacturing Index.

Futures for the Dow Jones DJc1, S&P 500 SPc1 and Nasdaq NDc1 were up between 0.4 and 0.7 percent.