* FTSEurofirst 300 gains 1.4 percent
* Banks boost index after BofA Merrill upgrade
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By Brian Gorman
LONDON, Oct 6 (Reuters) - European shares were sharply higher by midday on Tuesday with the heavyweight banking sector boosted by an upgrade from BofA Merrill Lynch.
At 1057 GMT the FTSEurofirst 300 was up 1.4 percent at 984.69 points. The European benchmark index is up more than 52 percent from its lifetime low on March 9, as investors have become more confident of the prospects of economic recovery.
The index fell to a four-week closing low on Friday after higher than expected U.S. jobless numbers, but U.S. services data on Monday, showing expansion for the first time since 2008, boosted investors' confidence.
An interest rate rise by Australia's central bank also signalled some policymakers were confident the recovery was gathering pace.
"The data has been more reassuring after last week's non-farm payrolls," said Philip Lawlor, chief portfolio strategist at Nomura, in London.
"Equity markets are discounting mechanisms. They see a large part of the recovery as in the bag. We had a V-shaped recovery from Armageddon." He added: "There will be some aimless trading, up some days, down on others until we start to get the data from third-quarter earnings."
The heavyweight banking sector added most points to the index, after BofA Merrill Lynch upgraded European banks to "overweight".
BNP Paribas, Banco Santander, Credit Suisse, HSBC, Intesa Sanpaolo and UBS rose between 1.5 and 5.1 percent.
"Sector EPS bottomed in Q2 and with further EPS upgrades ahead reasonable valuations offer the potential for re-rating, building on strong core profitability and positive trends in key wholesale and property markets," BofA Merrill Lynch said.
"Capital risks remain a medium term concern but competing aims of differing regulatory bodies suggest no rapid conclusion to this debate; meanwhile, the resolutely dovish rate stance of central banks underwrites abundant liquidity conditions." Societe Generale reversed earlier falls to trade 0.6 percent higher after unveiling a 4.8 billion euro ($7.0 billion) capital hike to repay state support and pursue acquisitions.
Insurers were also supported by increasing optimism on the outlook for the global economy. AXA, Aegon, ING Groep and Prudential rose between 2.1 and 4.4 percent.
OILS GAIN
Energy stocks were lifted as crude rose 1 percent to more than $71 a barrel.
BG Group, BP, Royal Dutch Shell, Total and ENI added 1.5-2.1 percent.
Miners were firmer as metal prices rose. Rio Tinto, Antofagasta, Xstrata, Anglo American and Kazakhmys gained 3.2-6.4 percent.
Around Europe, Britain's FTSE 100, Germany's DAX and France's CAC were up 1.5-1.6 percent.
Tesco, the world's third largest retailer, reversed earlier losses and was 0.8 percent higher after posting first-half profit towards the top end of forecasts.
Pharmaceutical company Shire was among the fallers, shedding 2.2 percent after UBS cut its rating for the drugmaker to "neutral" from "buy"', citing valuation grounds.
Futures for the Dow Jones, S&P 500 and Nasdaq were up between 0.8 and 1 percent.
HSBC's global strategists were upbeat for the prospects for equities.
"We expect that, for the next couple of quarters, growth will continue to surprise on the upside but (interest) rates remain ultra-low," it said in a note. "That is an almost perfect environment for equities; we stay positive and forecast indices to rise 20-25 percent by end-2010." (Additional reporting by Simon Falush; editing by Elaine Hardcastle)