STOCKS NEWS EUROPE-Alcatel extends short-covering rally

Shares in telecom gear maker Alcatel (Paris: FR0000130007 - news) -Lucent rise 5 percent as traders cite further short covering by hedge funds, rattled by last week's violent short squeeze on Nokia (Stockholm: NOKI-SEK.ST - news) following its deal with Microsoft (NasdaqGS: MSFT - news) .

Alcatel's stock - which has been one of the most shorted stocks in Europe along with Nokia (Xetra: 870737 - news) - has jumped nearly four-fold in the past year, sending hedge funds scrambling to close negative bets on the stock of the troubled company.

"In light of recent M&A, hedge funds are reviewing their short bets across the board. You don't want to be caught on the wrong side," a Paris-based trader says.

According to Markit data, 5.7 percent of Alcatel's shares are currently out on loan, down from 17 percent in late 2012, but still well above the market's average of 1.7 percent.

Last Tuesday, Nokia shares jumped nearly 50 percent on news the firm would sell its handset business to Microsoft, forcing many hedge funds to buy back the stock and exit their position, suffering a potential loss of up to $843 million.

Reuters Messaging: blaise.robinson.thomsonreuters.com@reuters.net