Italian bank rally sends European sector index to 11 month high

MILAN, Dec (Shanghai: 600875.SS - news) 6 (Reuters) - European banking shares soared more than 3 percent on Tuesday to their highest level in almost 11 months as investors dipped back into a beaten-down sector following Italy's constitutional referendum on the weekend.

The rally was led by Italian banking stocks which were up more than 7 percent, on track for its best one-day gain since mid-July and surging above pre-referendum levels.

The Italian banking index has lost nearly half of its value so far this year on worries over political instability and over how to handle a mountain of bad debt.

Traders were covering short positions in Italian banks ahead of the European Central Bank meeting this week and after Prime Minister Matteo Renzi said he would step down following a resounding defeat in a constitutional referendum.

"No one held Italian banks before the referendum. It's a matter of positioning and investors are now covering short positions," said Andrea Cuturi, Chief Investment Officer at Anthilia in Milan. He said European banks were supported by a continued rotation into cyclical stocks.

(Reporting by Danilo Masoni; Editing by Alistair Smout)