European equity markets bounced back yesterday, logging their largest gains in five months and more than reversing Wednesday's losses, on the back of a powerful overnight showing on Wall Street.

Investors put aside yet more gloomy US data and worries about war as the United Nations Security Council remained deeply divided over a new resolution on Iraq and the chances of averting war seemed to have dwindled to their lowest point yet.

But brokers were far from certain the rally would last, noting there was a large degree of irrationality in markets at present.

"For the time being, I would characterise this as a savage, bear market rally," said one European fund manager.

"We are cynical about chasing rallies like this."

Others attributed yesterday's bounce to short-covering by hedge funds.

"We still haven't seen any bounces that have had any sustainability. The economic data still doesn't look great and, from a psychological standpoint, the backdrop for investing is not a going one," another market commentator said.

European markets got off to a good start, cheered by reassuring results from Benelux financial group Fortis which helped the battered insurance sector to rebound.

In London, Britain's leading shares logged their biggest one-day percentage gain in more than 15 years as the FTSE 100 closed more than 6 per cent higher. Insurance stocks such as Friends Provident, Prudential and Aviva were among the biggest gainers.

In France, shares also surged by more than 6 per cent, German equities closed some 5 per cent higher while the Dow Jones Euro Stoxx 50 index was up by 6.3 per cent.

In Dublin, €965 million was added to the value of Irish shares as the market gained more than 2 per cent. The ISEQ was driven by strong performances from the likes of Irish Life & Permanent, which was up by more than 6 per cent on the day, and Ryanair, which added 8 per cent.

"The market is being driven by technical factors," one Dublin dealer said.

"It's difficult to say that the goings-on at the UN have contributed hugely to this."

The strong performance in European markets helped lift Wall Street.

The tech-laced Nasdaq Composite Index jumped 61.54 points, or 4.8 per cent, to 1,340.78, its biggest single-day gain since a 5.1 per cent surge on October 15th. The rally pushed the index barely into positive territory for the year, up 0.4 per cent.

The blue-chip Dow Jones Industrial Average soared 269.68 points, or 3.6 per cent, to 7,821.75. Only two of the 30 Dow components closed lower. The broader Standard & Poor's 500 Index climbed 27.71 points or 3.5 per cent to 831.9.

For the year, the Dow is down 6.2 per cent and the S&P 500 is down 5.5 per cent. - (Additional reporting by Reuters)