European shares end week higher after BOJ rate move

(Amends headline to reflect close of markets)

* FTSEurofirst notches up second straight week of gains

* Sabadell rises after strong results, Italy banks up

* Basic resources underperform on steel market warning

By Danilo Masoni and Atul Prakash

MILAN/LONDON, Jan 29 (Reuters) - European equities ended the week on a high after the Bank of Japan stunned markets on Friday by voting narrowly to introduce negative interest rates in a bid to revive inflation.

Equities were also underpinned by hopes the U.S (Other OTC: UBGXF - news) . Federal Reserve would go slow on future interest rate hikes following weaker-than-expected GDP data from the world's largest economy.

Japan's central bank said it would charge 0.1 percent for excess reserves parked with it, an aggressive deflation-fighting policy pioneered by the European Central Bank.

"The BOJ decision was a massive surprise; it's further money printing from Japan on a massive scale after having told the markets that they're not doing it. That triggered European investors to push the risk-on button on," Will Hamlyn, investment analyst at Manulife Asset Management said.

The pan-European FTSEurofirst 300 index closed up 2.3 percent, bagging its second consecutive week of gains. A turbulent start of the year triggered by concerns over slowing growth in China and tumbling oil prices, however, meant the index lost more than 6 percent overall in January - the worst monthly drop to start a year since 2008.

Japan has been wrestling with deflation since the 1990s, and its central bank is concerned about the time it is taking to reverse consumer expectations of price reductions.

"The signal that the Bank of Japan gives reminds us that central banks will continue to play their role of fighting deflation," said Philippe Gijsels, head of research at BNP (Paris: FR0000131104 - news) Paribas Fortis Global Markets.

"These actions typically drive up risky assets."

Among top sectoral movers, the European banking index rose 2.8 percent after an encouraging earnings report from Spain's Banco Sabadell and with some Italian banks underpinned by speculation over possible mergers.

Banco Sabadell gained 11.9 percent after posting a 91 percent jump in full-year net profit, boosted by its purchase of Britain's TSB that more than offset rising provisions for bad loans in the fourth quarter.

Popular (NasdaqGS: BPOP - news) and Caixabank (Amsterdam: CB6.AS - news) also rose sharply as an improvement in their underlying businesses overshadowed a miss for their 2015 profit forecasts.

Italy's Popolare di Milano rose 7.4 percent and Banco Popolare (Amsterdam: PB8.AS - news) was up 9.3 percent, with traders citing speculation they could be closer to a possible merger.

Monte dei Paschi (Milan: BMPS.MI - news) di Siena rose 1.2 percent after posting an annual profit for the first time in five years, helped by a change in the way it booked a controversial derivative trade, and after its CEO said a tie-up with rival UBI (Taiwan OTC: 6562.TWO - news) Banca could make sense. UBI fell 0.9 percent.

JCDecaux (Paris: FR0000077919 - news) shares surged 6.4 percent, the top FTSEurofirst 300 gainer, after the French outdoor advertising company reported higher revenues.

However, Norwegian fertiliser producer Yara fell 2 percent after posting fourth-quarter core profit below expectations, hit by lower sales and an impairment related to its plants in France and Trinidad.

Basic resource stocks fell 0.2 percent, making them the top sectoral faller, after Thyssenkrupp (Xetra: 750000 - news) warned that the situation on steel markets was grim and could have an impact on its outlook. ArcelorMittal (Other OTC: AMSYF - news) , the world's biggest steelmaker, fell 5.9 percent.

Today's European research round-up (Editing by Mark Heinrich)