* FTSEurofirst 300 ends up 1.3 pct; volume two-thirds 90-day av
* Cyclicals including autos, chemicals lead technical bounce
* Greek merger buoys banks
By Simon Jessop
LONDON, Aug 29 (Reuters) - European shares rose in a low volume, cyclical-led technical bounce to start the week in the black, buoyed by U.S. economic data and expectations the U.S. Federal Reserve will act again next month to stimulate growth in the world's largest economy.
Deal news underpinned the gains after Greek banks Alpha Bank
Adding to the positive sector sentiment, the European Commission said a fresh round of bank recapitalisations was not needed, dismissing comments from new International Monetary Fund head Christine Lagarde over the weekend.
The STOXX Europe 600 Banks index consequently ended
up 2 percent, with National Bank of Greece
With the UK market -- Europe's largest -- on holiday, volumes across the other markets were sharply reduced, however, making the strength and conviction of Monday's rally hard to assess, traders said.
By the close, the FTSEurofirst 300 index had added 1.3 percent in volume just two-thirds of its 90-day daily average. The positive start to the week built on a 1 percent gain last week, which snapped a four-week losing streak.
"It's a technical rebound from heavily oversold levels in low volumes," a Nordic-based trader said, citing gains for Germany's blue-chip DAX , which rose 2.4 percent but remained near to oversold on its Relative Strength Index chart.
SELL INTO THE RALLY
Koen de Leus, equity strategist at KBC, agreed the broader market bounce was a technical retracement, but added he remained cautious on equities and said: "If I was an investor who was overly invested I would sell into the rally."
Cyclical sectors were among the chief gainers as the STOXX Europe 600 Automobiles & Parts , Chemicals and Construction & Materials rose between 1.9 percent and 3 percent, clawing back some of their double-digit August falls.
Comments from U.S. Federal Reserve Chairman Ben Bernanke late on Friday gave some investors hope he would announce extra stimulus measures at an extended Fed meeting next month, driving U.S. market gains after the European close on Friday and fuelling Monday's rally in Asia and Europe.
His more optimistic reading on the longer-term economic outlook meant some viewed the possibility of avoiding recession or getting a fresh stimulus as something of a "win-win", a senior sales trader at a European investment bank said.
Data on Monday showing U.S. consumer spending rose at its fastest pace in five months in July helped remove some fears of U.S. recession, buoying stocks ahead of key ISM and jobs data later in the week, although de Leus was underwhelmed.
With a chunk of the increase coming from people's savings, it did not yet point to a sustainable recovery, he said, citing the two data readings later this week as a more important driver of the short-term direction for equities.
Adding to the cautious outlook, the International Monetary Fund lowered its outlook for the U.S. economy to 1.6 percent from 2.5 percent and said the European Central Bank and Federal Reserve must be ready to ease policy further. (Editing by David Holmes)
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