European shares rallied on Monday, led by UBS as its announcement of subprime-related losses ignited speculation that the worst of the damage of the credit crunch may be behind the wealth manager.

The FTSEurofirst 300 index of top European shares finished 0.8 percent higher at 1,563.2 points, up from the day's low of 1,541.8. The index has gained over 5 percent so far this year.

UBS, the world's largest wealth manager, was the top weighted gainer, even though it said it would write down $3.4 billion in losses and shake up its management.

The fact that it's now out in the open, at least we can put some size on the exposure and the hit they've taken, rather than everybody trying to second-guess it, said David Jones, CMC chief markets analyst.

UBS shares were up 3 percent, having fallen by more than 4 percent earlier in the day.

Citigroup (C.N: Quote, Profile, Research), the largest U.S. bank by market value, also said it would record a 60 percent fall in third-quarter net income because of the turmoil in financial markets stemming from subprime lending.

Banks that are coming out with more information are settling down a bit, said a fund manger, adding that investors were perhaps expecting no more immediate bad news from those companies.

A rate cut from the U.S. Federal Reserve along with ample injections of liquidity from other major central banks has helped the broader European equities market recover more than 60 percent of the decline from the 2007 high in mid-July to the eight-month lows of mid-August, even though credit conditions remain tight.

Three-month euro LIBOR rates fixed at six-year highs on Monday, because of the need to meet cash requirements for the new year period.

Adding a positive undertone was the Institute for Supply Management (ISM), which reported a slowdown in nationwide U.S. manufacturing activity in August, but also a fall in prices, which soothed some concern about inflation as oil prices linger near record highs.

A rally in the gold price to near 28-year highs and platinum near record highs pushed up mining stocks, with BHP Billiton up 3.7 percent, Anglo American up 2.2 percent and Rio Tinto up 2.4 percent.

London's FTSE 100 index rose 0.6 percent, while Frankfurt's DAX gained 0.8 percent and Paris's CAC 40 rallied 1.0 percent.

German tourism and shipping group TUI was one of the top gainers in Frankfurt as its shares rose by 5.6 percent after U.S. investor Guy Wyser-Pratte told Reuters he may buy more shares in the company.

TUI shares have risen by 10 percent since Friday when it became known that Wyser-Pratte had bought 1 percent of the company's stock.

Among decliners was Finnish mobile phone maker Nokia, which fell 1.8 percent, making it the biggest negative weight on the FTSEurofirst 300, after it said it will offer $8.1 billion for U.S. based digital map supplier Navteq, in its largest takeover ever.

(Additional reporting by Anshuman Daga)