* FTSEurofirst 300 up 0.2 pct, up 7 pct in three weeks
* Rhodia jumps 49 pct after Solvay bid
* ECB rate hike seen as supportive for European stocks
* Time to buy volatility derivatives, Nomura says
By Blaise Robinson
PARIS, April 4 (Reuters) - European stocks rose in early trade on Monday as merger activity kept the market's three-week rally going ahead of an expected interest rate rise by the European Central Bank seen as supportive for European equities.
Shares in chemical group Rhodia jumped 50 percent after Solvay launched a 3.4 billion euro agreed bid for its French rival, while Vodafone also rose after selling its 44 percent stake in France's second-biggest mobile telecoms operator SFR to Vivendi for a total of 7.95 billion euros ($11.3 billion).
Solvay was up 3.1 percent while Vivendi gained 0.4 percent.
"The newsflow coming from the M&A front is very welcome. We've been expecting it for a while, so it's a very good start for the quarter," said David Thebault, head of quantitative sales trading, at Global Equities in Paris.
On Friday Nasdaq OMX and Intercontinental Exchange launched a counter bid to buy NYSE Euronext, trumping an initial bid from Germany's Deutsche Boerse. At 0855 GMT, the FTSEurofirst 300 index of top European shares was up 0.2 percent at 1,143.91 points, after gaining 1.5 percent on Friday.
The benchmark index has risen about 7 percent since reaching a floor in mid-March, but it is still down 4 percent from a peak touched in mid-February.
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Interactive graphic on M&A: http://r.reuters.com/kyb46q
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Heavyweight mining shares gained ground, with Xstrata up 0.9 percent, rising along with metal prices.
Around Europe, UK's FTSE 100 index was up 0.2 percent, Germany's DAX index up 0.2 percent, and France's CAC 40 up 0.05 percent.
Later in the week, investors will turn their focus on the ECB's decision on interest rates, due on Thursday.
Societe Generale strategists see the expected rate hike as supportive for European equities, as it should boost the euro currency and tame inflation fears.
"The euro strengthening versus the U.S. dollar should lead to a re-rating of European equities. Cheap valuation should allow European equities to absorb higher European bond yields," Societe Generale's strategists wrote in a note.
Despite the brisk three-week rally, European stock valuation levels remain comparatively low. Europe's broad STOXX 600 index carries a forward price-to-earnings (P/E) ratio of 10.5, well below its 10-year average of 13.6.
Investors seeking protection for their equity portfolios should start buying volatility derivatives again as the main volatility indexes fall back toward their long-term averages following a recent spike triggered by violence in Libya and Japan's nuclear crisis, said Frederic Cezard, executive director at Nomura in Paris.
"We're back to good entry levels. The market is getting used to the negative newsflow coming from the Fukushima nuclear plant ... At these levels we see the return of inflows into volatility derivatives," he said.
Volatility indexes won't fall much further as a number of worries, from unrest in the Arab world to the euro zone debt crisis, will continue to rattle investors and could spark sudden surges in volatility, Cezard warned.
Volatility derivatives are used by equity fund managers as a protection against market corrections because of their strong negative correlation with stocks. ($1=.7031 euros) (Editing by Greg Mahlich)