European stocks rose in early trade on Thursday, reversing all of the previous session's losses, but nagging worries over the euro zone debt crisis after the European Central Bank's 3-year tender were seen capping the rebound ahead of the holiday break.

Appetite for defensive stocks remained brisk, with the pharmaceutical sector index <.SXDP> hitting its highest level since mid-2007.

At 9:50 a.m. (British time), the FTSEurofirst 300 <.FTEU3> index of top European shares was up 1 percent at 981.04 points in thin trade, after losing 0.5 percent on Wednesday. The euro zone's blue chip Euro STOXX 50 <.STOXX50E> index was up 1.4 percent at 2,275.54 points.

European banks took up nearly 490 billion euros in three-year loans from the ECB on Wednesday, initially easing credit crunch worries, but investors' relief was quickly eclipsed by doubts the banks would use the funds to buy euro zone peripheral debt and ease the pressure on debt-stricken countries.

The initial feedback from Spanish and Italian banks is that the banks won't play carry trade. They reject the idea of using 3-year LTROs to purchase government bonds, a Paris-based trader said.

The STOXX Banking index <.SX7P>, Europe's worst sector this year with a loss of 34 percent, featured among the top gainers on Thursday. Barclays was up 2.7 percent, BNP Paribas up 2.4 percent and UniCredit up 2.3 percent.

Overall, we view the large uptake (at the ECB tender) as positive for the European banks. Leaving aside whether it is good policy or not, it removes funding risk, adds to profits, and also adds to retained earnings and capital, Deutsche Bank analysts wrote in a note.


We do not know at this stage ... what might be used for sovereign carry-trades. We tend to view that the bulk is due to the banks taking a cautious outlook ahead of January and pre-funding aggressively, the Deutsche Bank analysts added.

Around Europe, the FTSE 100 index <.FTSE> was up 1.1 percent, Germany's DAX index <.GDAXI> up 1.3 percent, and France's CAC 40 <.FCHI> up 1.2 percent.

The FTSEurofirst 300 is on track to record a loss of 13 percent for 2011, while the FTSE 100 is down 7.6 percent, the DAX down 15 percent and the CAC 40 down 19 percent.

Despite attractive equity valuation levels, investors have been reluctant to buy stocks ahead of crucial tests in the bond market in first quarter of 2012. According to the ECB, some 230 billion euros (192 billion pounds) of bank bonds and 250 to 300 billion in government bonds are falling due during the quarter.

After surging more than 2 percent following the ECB tender on Wednesday, the Euro STOXX 50's rally petered out, with the index breaking back below its 50-day moving average before running into strong support around the 50 percent Fibonacci retracement of its rally in late November-early December.

Since late October, the index has formed a symmetrical triangle chart pattern with lower tops and higher bottoms, and could remain stuck in the triangle for a few more sessions before breaking out of it. Chartists said there aren't any clear signals as to which direction the index will take when breaking out of the triangle.

The recent movements are caused by stop-losses loosely placed by operators and not the result of strong conviction, said Valerie Gastaldy, head of Paris-based technical analysis firm Day By Day, warning about the risk of a potential sharp pull-back in the longer term.


The relative strength charts warn of a collapse in January. The relative strengths of the defensive sectors are all very overbought, and have hardly any room for improvement in the short-term.

Sectors seen as less sensitive to economic cycles have seen strong demand over the past months, with the STOXX healthcare index <.SXDP> hitting its highest level since mid-2007 on Thursday and the STOXX food and beverage index <.SX3P> reaching a near-six month high.

The healthcare index's chart also shows divergence between the index's recent gains and its relative strength index (RSI), whose peaks have shown a declining trend over the past few days, signalling that the sector was ripe for a significant pull-back.

On the macro front, investors were bracing for a raft of U.S. data due later on Thursday, including the final third-quarter GDP figure, the University of Michigan final December consumer sentiment index as well as the Conference Board's leading indicators for November,

(Reporting by Blaise Robinson; Editing by Hans-Juergen Peters)