(REUTERS) - European shares extended a rally into a fourth session on Wednesday, with miners reversing earlier losses after resource-hungry China cut the reserve requirement for banks to ease credit strains and bolster its economy.

The STOXX Europe 600 Basic Resources Index was up nearly 2 percent by midday, having earlier been in negative territory.

China's central bank cut the reserve requirement ratio for its banks by 50 basis points on Wednesday, the first reduction in nearly three years.

China, the world's second-largest economy, is the top global metals user and the cut is seen as positive for demand there.

The move was enough to sharply increase short-term demand (for) mining stocks, said Joshua Raymond, chief market Strategist at City Index.

But it also gave a fillip to the wider market, which had earlier focused on Standard & Poor's downgrading of several banks and had given only a lukewarm response to the latest efforts to resolve the euro zone debt crisis.

At 1227 GMT, the FTSEurofirst 300 index of top European shares was up 0.7 percent at 954.44, having been as low as 936.66. The gains in recent days have helped cut the index's losses for November, which look set to come in at 4.2 percent. It also rose above its 50-day moving average, a positive signal for equities.

Euro zone ministers agreed to boost their rescue fund late on Tuesday, but couldn't say by how much, and may turn to the International Monetary Fund for additional help.

It's not a resolution of the issue by any stretch of the imagination. The way we stand is just we're just waiting for the 9th (an EU summit on Dec. 9), said Ian King head of international equities at Legal & General, which has 356 billion pounds ($555 billion) under management.

He warned of increasing volatility, and that there still wasn't much conviction behind the rally.

Volumes are shocking. We can expect more volatility in the coming days and weeks. But if the summit comes up with something more meaningful than we've has thus far, I think people would take that relatively positively.

He also pointed to high sovereign bond yields as a reason for caution. The 10-year Italian bond yields remained well above 7 percent, higher than the levels at which Greece, Ireland and Portugal were forced to apply for EU/IMF bailouts. Higher bond yields have been a major factor in pulling equities lower in November.


The heavyweight banking sector had also moved out of negative territory by midday, shrugging off the ratings agency downgrade.

The STOXX Europe 600 Banking Index rose 1 percent. percent. Lloyds was up 4.4 percent, having fallen earlier.

S&P cut its credit ratings by one notch on 15 major banks, including Lloyds, as the result of a sweeping overhaul of its ratings criteria. The move could increase already-soaring funding costs for a number of banks.