LONDON (Reuters) - European shares staged their sharpest rise in two weeks on Wednesday, driven by strong U.S. data, a long-awaited coalition deal in Germany and positive outlook comments from Italian insurer Generali (GASI.MI).
The pan-European FTSEurofirst 300 rose 0.5 percent, its biggest gain since November 14, to 1,300.51 points .FTEU3, taking its year-to-date gains to nearly 15 percent and keeping it on track for its best year since 2009.
Volume on the index, however, was 25 percent below its average for the past 90 days, suggesting there were relatively few investors behind the rise. Many traders were away ahead of Thanksgiving Day in the United States on Thursday.
Shares extended gains in late trade after the November Chicago Purchasing Managers Index and the final November Thomson Reuters/University of Michigan gauge of consumer sentiment beat expectations, indicating that conditions in the world's largest economy continue to improve.
In a sign of steady healing in the U.S. labor market, weekly jobless claims for unemployment benefits unexpectedly fell in the latest week.
Investors have been weighing the benefit of stronger growth in the United States, Europe's largest trading partner, against the prospect of reduced monetary stimulus from the Federal Reserve. The stimulus has helped to fuel a 19 percent rally in European shares since September 2012.
The reaction to recent estimate-beating U.S. economic data has been largely positive as investors are not expecting the Fed to start cutting back its stimulus program this year.
"Until we see some action from the Fed it will stay like that," said Mike Reuter, global equity broker at Tradition.
"But there is little conviction out there. The long funds are just sitting there holding their positions. It's not a healthy market."
Among the few heavily traded stocks was Italian insurer Generali (GASI.MI), which rose 1.5 percent in volume 40 percent above its average after saying it aimed to pay higher dividends.
Broader market sentiment was supported by news from Germany, where conservatives and the centre-left Social Democrats (SPD) finally agreed to a "grand coalition" after all-night talks, paving the way for Chancellor Angela Merkel to form a government by Christmas.
"It's definitely a positive for sentiment, it gives the market a bit of certainty on a key issue," said Daniel McCormack, a strategist at Macquarie.
"The SPD are a bit more pro-European than (Merkel's) Christian Democrats ... so it definitely benefits the periphery at the margin. You are likely to see more favorable policies towards them, but it's not a game changer."
The German DAX rose 0.7 percent to 9,351.13 points, a new record close .GDAXI, while Italy's FTSE MIB .FTMIB and Spain's IBEX .IBEX rose 0.8 percent and 1 percent respectively.
The German coalition deal included setting a national minimum wage and increasing pensions, which should help boost activity in Europe's largest economy.
"One could say it's fostering somewhat the consumer side because we are getting a minimum wage ... Germany is getting a more domestically-focused economy. It's not happening overnight but this could be one element of appeal for equity investors," said Gerhard Schwarz, head of equity strategy at Baader Bank.
History bodes well for continued gains in coming weeks. The index has risen in 15 of the past 20 Decembers, averaging a 2.3 percent rise in what has historically been its second best performing month after April, according to Datastream.
Additional reporting by Toni Vorobyova; Editing by Gareth Jones