By Sara Sjolin
LONDON (MarketWatch)--Europe's benchmark stock index posted its first weekly gain in four weeks Friday, as a surprisingly upbeat reading on Germany's business climate fueled investors' risk appetite, with Italian elections over the weekend also in the limelight.
The Stoxx Europe 600 index rallied 1.3% to close at 288.57, climbing back after a 1.5% drop Thursday.
The index nudged out a 0.4% weekly gain, following a week of sharp swings as investors worried about the outcome of the Italian election Sunday and Monday. Global financial markets have moved broadly higher this year, blessed with a strong risk-on sentiment as signs of economic recovery lift investors' spirits. However, mixed European data and worries over the U.S. Federal Reserve monetary-easing program sent markets wobbling this week.
"I think investors have been slightly unclear about what direction to take ahead of the Italian election this weekend. There's a lot of uncertainty," said Guy Foster, head of portfolio strategy at Brewin Dolphin.
"Yesterday, you had the minutes from the Fed and investors are always desperate for signs about what will happen to quantitative easing. They are looking for a ghost that is not really there. The minutes didn't really suggest anything new, but it just happened in addition to no other good news that day," he added. "Investors are thinking this is a good opportunity and are taking advantage of the little window that has opened."
Among notable movers in the pan-European index, shares of Elan Corporation PLC rose 4.2%. The biotech firm said it would buy back $1 billion of its own shares, using money from the sale of its multiple-sclerosis drug Tysabri.
Pointing in the other direction, shares of Air France-KLM dropped 6.7%, after the airline said its loss widened in 2012 compared to 2011.
Shares of Finmeccanica SpA slumped 4.1%, after the defense group said it would delay publishing its full-year results amid a bribery probe into a sale of helicopters to Indian authorities.
For the broader European stock market, upbeat data out of Germany helped lift the trading mood. The Ifo Business Climate index jumped to 107.4 in February, exceeding expectations of a 104.7 reading.
On a more downbeat note, the European Commission said the euro-zone economy will shrink for the second year in a row, as a return to growth appears to be more gradual than expected.
Investors also trained their attention on general elections in Italy over the weekend, with worries a new government including former Prime Minister Silvio Berlusconi will fail to follow up on the country's current reformist drive. Several parties including Berlusconi's have openly campaigned against the austerity measures the nation had to implement in order to meet its EU commitments.
"The market is currently pricing in a rather constructive election outcome, in our view. However, we still see a realistic risk either of a hung parliament, or a potentially difficult and protracted negotiation process as [center-left candidate Pier Luigi] Bersani and [Prime Minister Mario] Monti seek to form a coalition," analysts at RBC Capital Markets said in a note.
"That leaves us remaining cautious about peripheral exposure in outright terms and in [yield spreads between Italian government bonds and German bunds] in the near term," they said.
Polls aren't allowed in the final weeks leading up to the election in Italy, but polls published before the cutoff date put a center-left coalition led by Bersani in the lead.
Italy's FTSE MIB index posted a 1.6% weekly loss, but was up 1.4% to 16,233.28 on Friday.
Among other country-specific indexes, France's CAC 40 index added 2.3% to 3,706.28 and rose 1.3% on the week. Banks were on the rise, with shares of Societe Generale SA up 1.8% and BNP Paribas SA 2.7% higher.
Shares of Alcatel-Lucent slipped 1.8% after the telecom-equipment maker appointed Michel Combes, former head of Vodafone Group PLC's European operations, as new chief executive. Additionally, HSBC lifted the stock to neutral from underweight.
In Germany, Deutsche Bank AG climbed 1.9%. The DAX 30 index moved 1% higher to 7,661.91 and closed out the week 0.9% higher
Volkswagen AG slid 7%, as the car maker said it sees flat operating profit in 2013 amid intense competition and an uncertain economic environment.
And in the U.K., J Sainsbury PLC gained 2.1%, after Citigroup lifted the supermarket retailer to buy from neutral.
The FTSE 100 put on 0.7% to 6,335.70 and added 0.1% on the week.
Write to Sara Sjolin at AskNewswires@dowjones.com