LONDON  - European stock markets closed sharply higher Thursday in a technical rebound sparked by Wall Street as concerns over the US economy and financial system eased following better-than-expected bank results. Sharp falls in oil prices in the past two days also helped shares after days of heavy losses, while the bad news flow was reversed by solid results for the banks, belying fears of further damage due to the US subprime home loan crisis. Adding to the positive tone, the International Monetary Fund raised is 2008 global growth forecasts " to 4.1 percent from 3.7 percent " but also cautioned on inflation, increased to 3.4 percent from 2.6 percent for developed economies. In emerging economies, the inflation risk will be even more pronounced, with the IMF forecast increased to 9.1 percent from 7.4 percent as it factored in higher oil prices. Despite such concerns, the IMF said the outlook for the United States, the world's biggest economy, was not as dire as initially projected, putting 2008 growth at 1.3 percent. Dealers said the turnaround was very sharp in Europe, with gains of two percent or more in most centres after days of bad news and gloomy predictions had beaten stocks down to multi-year lows. At the same time, however, they noted that a pickup in oil prices late in the afternoon sparked a quick retreat, taking the markets off their highs " London having been up 3.3 percent at one stage. In London, the FTSE 100 index closed 2.63 percent higher at 5,286.30 points. In Paris, the CAC 40 gained 2.76 percent to 4,225.99 points and in Frankfurt the DAX rose 1.88 percent to 6,271.27 points. The Euro Stoxx 50 index of leading European companies was up 2.56 percent. The euro was at 1.5866 dollars. In late trade, the New York August oil contract was down 79 cents at 133.81 dollars. In Asia, Japanese shares closed 1.00 percent higher, Hong Kong was up 2.41 percent and Sydney added 0.6 percent. The key to Thursday's performance was a Wall Street gain of 2.52 percent Wednesday, driven by better-than-expected second-quarter earnings from California-based bank Wells Fargo. That combined with a similar report Thursday from JP Morgan Chase gave a much-needed confidence boost to the banks and eased nerves that they faced yet more heavy losses on their US subprime home loan exposure. "The rise in financials reverses five days of sharp falls that accelerated in the first two days of this week," said ABN Amro analyst Melinda Smith. It was "significant enough to calm nerves but still leaves us a long way from thinking the worst has past given the ongoing concerns over inflation, growth and financial markets," she said. "Therefore sentiment still remains fragile." On Thursday, Wall Street was much more circumspect, especially after the late spike in oil prices, but then moved ahead again to trade up 0.48 percent on the Dow Jones Industrial Average around 1615 GMT. "This rally may have legs that could extend for more than a couple of sessions if we continue to get a stream of better-than-expected earnings news from leading companies in sectors that had been under duress," said Fred Dickson, analyst at DA Davidson & Co. Wells Fargo and JP Morgan Chase results "are good examples of banks delivering essentially lousy earnings but substantially beating estimates, thereby sending a message that the situation in the financial sector isn't quite as bad as Wall Street previously feared," he said. In London, the banks led the way with substantial gains. Royal Bank of Scotland gained 8.79 percent to 179.50 pence, Barclays rose 8.90 percent to 290.50 pence and Lloyds TSB added 5.81 percent to 300.50 pence. In Paris, dealers noted that the gains came in very heavy trade, normally a positive sign, with stocks widely believed to have been oversold. One dealer cautioned that the rebound was only to be expected after recent sustained losses and the corporate outlook for the balance of the year was not good. Among the banks, BNP Paribas jumped 6.55 percent to 58.64 euros and Credit Agricole gained 8.13 percent to 13.03 euros. Investment bank Natixis bounced 11.48 percent to 5.34 euros, having been one of the worst hit stocks. In Frankfurt, Deutsche Bank rose 7.12 percent to 54.48 euros while mortgage specialist Hypo Real Estate added 6.83 percent to 16.43 euros. Continental was down 2.48 percent to 72.10 euros as it rebuffed a takeover offer from family owned Schaeffler. Elsewhere in Europe, the Bel-20 index in Brussels jumped 3.25 percent, Madrid's Ibex-35 added 3.14 percent, Italy's Mib-30 put on 1.62 percent, the AEX 25 in Amsterdam rose 2.26 percent and Switzerland's SMI 25 was up 2.36 percent.