By Blaise Robinson
PARIS (Reuters) - European stocks rose by mid morning on Tuesday, gaining ground for the fourth straight session, propelled by surging banking stocks such as Deutsche Bank <DBKGn.DE>, while investors braced for U.S. housing data.
Better-than-expected data from Germany's ZEW survey also helped boost sentiment. The ZEW economic sentiment index rose to 31.1 in May from 13.0 in April.
Shares in Bank of Ireland <BKIR.I> leapt 27 percent after the lender said it would buy back debt in a boost for its capital position.
Heavyweight mining shares were also on the rise, enjoying sharp gains in metal prices. Anglo American <AAL.L> gained 6.2 percent and Xstrata <XTA.L> rose 6.6 percent.
At 0840 GMT (9:40 a.m. British time), the FTSEurofirst 300 <.FTEU3> index of top European shares was up 1.6 percent at 873.67 points.
The index has surged 35 percent since reaching a lifetime low in early March, as fears over a global economic depression receded, but is still down 47 percent from a multi-year high touched in mid-2007.
Arthur van Slooten, European equity strategist at Societe Generale, said investors were keen on adding more risk into portfolios, reassured by signs of improvement in the credit market.
"This rally has been a correction of the equity risk premium, and obviously not based on an improvement on the earnings side," he said.
Banks gained ground again, with HSBC <HSBA.L> up 3.8 percent, BNP Paribas <BNPP.PA> up 5.3 percent and Deutsche Bank <DBKGn.DE> up 6.6 percent. The DJ STOXX banking index, which was up 3.7 percent on Tuesday, has shot up 114 percent since early March.
UK lenders were particularly in focus after a source said UK Financial Investments (UKFI), which manages Britain's stakes in Royal Bank of Scotland <RBS.L> and Lloyds Banking Group <LLOY.L>, had been sounding out investors who may be interested in buying some of its holdings.
According to the source, Britain has held talks with investors to gauge their interest in buying its stakes in the part-nationalised lenders, and could begin selling its holdings within a year.
Royal Bank of Scotland rose 5.6 percent and Lloyds added 4.5 percent.
BACK TO NORMAL?
Analysts are pointing out that an improvement in the credit market over the past few weeks has been helping the recovery in equity prices.
European credit spreads, reflected in indexes such as the investment-grade Markit iTraxx Europe index as well as the Markit iTraxx Crossover index, have sharply tightened since March.
"The Libor (London interbank offered rate) has come down a lot, and that is excellent news. It means the credit crisis is being overcome. In that respect, the equity rally we have seen since March was justified," said van Slooten.
A Reuters poll showed on Monday that more than half of euro zone money market dealers think the worst of a liquidity crisis dating back to 2007 is over, although some large banks still think it has further to run.
Around Europe, the FTSE 100 index <.FTSE> was up 1.1 percent, Germany's DAX index <.GDAXI> was up 2 percent and France's CAC 40 <.FCHI> was up 1 percent.
Bucking the trend, British retailer Marks & Spencer Group <MKS.L> dropped 7.7 percent after it posted an expected 40 percent slide in full-year profit and cut its final dividend by a third to conserve cash, just 12 months after increasing it.
Other consumer-related stocks were on the downside. Tesco <TSCO.L> was down 1.1 percent and Unilever <UNc.AS> was down 2.2 percent.
On the macro front, investors were bracing for key U.S. housing starts and build permits, due at 1230 GMT, looking for insight on the health of the battered housing sector.
(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)