PARIS, Feb 24 (Reuters) European shares rose on Friday as strong earnings from Lloyds TSB's lifted the banking sector and utilities M&A remained in focus, but investors questioned how long the indexes can continue to rise.
''The markets are not that strong, it's the banks that are keeping things afloat on the day,'' said Tom Hougaard, chief market strategist at City Index in London.
Lloyds shares rose 5 per cent after the bank, Britain's largest unsecured lender, posted a 4 per cent rise in underlying 2005 profit.
Royal Bank of Scotland shares gained 1.6 per cent, and HSBC was up 1.5 per cent.
The FTSEurofirst 300 index of leading European shares was 0.3 per cent higher at 1,358.96 points by 1136 GMT (1706 IST), within sight of Thursday's 4-1/2 year intraday peak of 1,361.7 points, having closed 0.2 per cent lower on Thursday.
''...we are holding the flat line, but we are vulnerable to the downside. A lot of people are getting worried about the market...we are long overdue for a decent correction,'' Hougaard said.
The outlook for interest rates was also in focus as recent euro zone business confidence indicators have been stronger than expected, sparking talk that the ECB may continue raising interest rates after next week's widely expected 25 basis point increase, which is fully priced in by markets.
But higher short-term interest rates may not necessarily augur ill for equities, ABN AMRO said in a research note.
''Interest rates pose little medium-term risk to equities in our view,'' said ABN analyst Lars Kreckel.
''The market seems too complacent about further rate hikes in the U.S., yet overly concerned about the outlook for euro area inflation and rate hikes,'' he said.
SPOTLIGHT ON UTILITIES Shares in Gaz de France and Franco-Belgian utility Suez jumped on newspaper reports that they were considering an alliance to fend off any approach for Suez from Italy's Enel.
In an unsourced report, British and French newspapers said the potentially government-backed move could be imminent and could involve in a first step a share swap to make any takeover bid harder for Enel.
''It makes sense from a strategic point of view, it's the perfect poison pill as the French government is in GDF. From a financial point of view it is very good for both companies,'' said a trader.
Shares in Suez leapt 4.4 per cent and GDF gained 2.3 per cent, while Enel lost 1 per cent.
In the latest round of corporate results, WPP Group, the world's second-largest advertising company gained 6 per cent after its full-year profit climbed well ahead of expectations on strong growth in China, India and the United States.
Repsol shares gained 0.4 per cent after the Spanish oil group reported a 19 per cent increase in adjusted fourth-quarter net profit, beating consensus in a Reuters poll of analysts.
Sanofi-Aventis shares rose 0.4 per cent after the French drugmaker reported fourth-quarter net profit just above expectations and forecast 10 per cent earnings per share growth in 2006.
But shares in InBev fell more than 2 per cent even though the world's largest brewer reported 2005 earnings just above the average forecast in a Reuters poll.
The mining sector weighed after news that platinum producer Lonmin was no longer in talks about a possible takeover, which sent its shares tumbling 7 per cent. Heavyweight Rio Tinto shed 2.5 per cent.
REUTERS SD KP1825