Wall Street's 1.1% rise on Friday and reports that Deutsche Bank is to buy Bankers Trust for $9.5bn fuelled early gains in Europe.

Frankfurt

German shares traded higher around midmorning, driven by merger-driven speculation in the banking sector and market enthusiasm.

At 1042 GMT the Xetra Dax was 74.32 points higher at 4985.75.

The index briefly broke above 5000 points, peaking at 5009.58, but traders expressed concern.

"The market has gone too far," said Uwe Zweigler, a trader at Commerzbank in Frankfurt, adding that the initial overshooting was spurred by a psychological drive to exceed the key index resistance level.

Merger speculation drove bank shares up after weekend reports that Deutsche Bank is close to settling a deal with US Bankers Trust.

Shares in Deutsche Bank were up DM4.80, or 4.5%, at DM112.30.

Dresdner Bank said a merger was not in the offing, despite comments by Chairman Bernhard Walter in a radio interview that such a move would be an option for the bank.

A spokeswoman said the radio had read too much into the comments, but Dresdner shares soared in a generally buoyant sector.

By midmorning its shares were up DM3.90, or 5.9%, at DM70.00.

Paris

Shares were higher in early trading, led by another surge in banking shares.

By 1042 GMT, the Cac 40 index was up 49.92 at 3852.62.

Leading the gainers, Societe Generale's shares were trading up 6.2%, shares in investment bank Paribas were up 4.4% and Banque Nationale de Paris' shares were up 4.1%.

Recent comments by Claude Bebear, chairman of French insurer group Axa, that he is ready to seize a major acquisition reignited rumours over a consolidation involving investment bank Paribas, traders said.

Another rumour is that the Netherlands' ABN Amro is talking to Societe Generale about a possible merger.