European Commission President Jose Manuel Barroso addresses the European Parliament during a debate on the state of the EU in Strasbourg Sept 28, 2011. [Photo/Agencies]

LONDON - European shares cut losses on Wednesday on hopes Greece's lenders could release aid for the country after inspecting austerity plans, although investors stayed cautious on worries how countries will vote on widening the scope of a rescue fund.

Comments from European Commission President Jose Manuel Barroso on the possibility of a wider lending mechanism to support Greek banks also helped the market, which has posted strong gains in three sessions on hopes that European policymakers would step up efforts to resolve the crisis.

However, uncertainty over the ways to resolve the euro zone debt crisis remained and politicians are yet to agree on a credible and workable plan to avoid a Greek default and contain the debt crisis engulfing countries such as Italy and Spain.

German Chancellor Angela Merkel suggested that parts of a planned new 109-billion-euro ($148.6 billion) rescue for Greece could be reopened, depending on the outcome of the audit by inspectors, who are expected to begin talks on Thursday on a plan demanded by lenders to deepen budget cuts and raise taxes.

"The main driver for the stock market's move is, and remains, comments and actions by central banks and governments. If they are able to put aside their difference, we will set an important step in the direction of the normalisation," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"The market's focus would once again shift to fundamentals like economic data and corporate earnings. However, the healing process will still take quite a bit of time."

At 1143 GMT, the FTSEurofirst 300 index of top European shares was down 0.3 percent at 935.46 points after falling to a low of 926.52 earlier in the session.  

The index has surged nearly 8 percent in three sessions, but is still down 16.6 percent this year on concerns about the pace of global economic recovery and that European banks, which have significant exposure to peripheral euro zone countries, could face a funding squeeze.

The STOXX Europe 600 banks index , which fell 1 percent on Wednesday, is down 31 percent this year to feature as the second-biggest decliner. Man Group , down 19.3 percent, dragged down the financial services sector after its total assets under management fell sharply.  

Thomson Reuters Datastream showed the ratio of put/call open interest on the Euro STOXX 50 eased to 1.1025, hitting a more than 10-month low, suggesting traders were still wary about equities despite the recent sharp rebound.

 

Technical outlook

Charts showed the recent downward trend was losing momentum, but the main barrier for Euro zone's blue chip index Euro STOXX 50 remained at around 2,207 points where a 16-point gap opened up over two trading days in early September.  

The index was up 0.1 percent at 2,195.21 and analysts said the market needed to go above 2,207 to confirm it had bottomed out for the time being. They added that beyond that, the index might witness a corrective rally back up towards 2,400.

"Momentum oscillators are showing that the risk is on the upside. There is a bullish divergence between the price and the nine-day RSI (relative strength index), with the price making lower lows, but the RSI making higher lows," said Phil Roberts, chief European technical strategist at Barclays Capital.

Defensive stocks were in demand, with the European healthcare index rising 0.7 percent and utilities up 0.3 percent.