European shares extended the previous session's sharp rally on Monday on optimism that technocrat leaders in Italy and Greece would push for radical reforms to contain the euro zone debt crisis.

Italy's president asked former European Commissioner Mario Monti on Sunday to form a government, while Greece's new Prime Minister Lucas Papademos, a former central banker who oversaw his country's entry to the euro zone in 2002, will face a confidence vote in his cabinet on Wednesday.

We have now got two strong characters who are prepared to put public interest ahead of personal interest and they have a lot of goodwill to start with. The challenge for them now is to implement the fiscal austerity and budget reforms, Mike Lenhoff, chief strategist at Brewin Dolphin, said.

The important thing for them is to attempt to re-establish credibility as quickly as possible. The first test of this will be the reception of the bond auction in Italy.

Italy will auction up to 3 billion euros in five-year bonds later in the session. Italian 10-year bond yields soared above 7 percent last week to levels seen as unsustainable.

At 8:02 a.m., the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.5 percent at 989.10 points after rising 2.2 percent on Friday on political progress in Italy, while Italy's FTSE MIB <.FTMIB> was up 1.3 percent after hitting a two-week high.

Banks <.SX7P>, many of which are highly exposed to Italy and Greece and have suffered this year on the region's debt crisis, were 1.6 percent higher and featured among the top gainers. KBC Groep rose 5.9 percent.

(Reporting by Atul Prakash)