* FTSEurofirst 300 ends up 0.8 pct
* Technically backed bounce capped by sovereign concerns
* Banks recoup small change from recent sell-off
By Simon Jessop
LONDON, July 19 (Reuters) - European shares ended higher on Tuesday after banks bounced from two-year lows ahead of a crucial meeting of political leaders aimed at resolving the regional debt crisis.
Indecision over how to fund a fresh Greek bailout, placate markets and stop the problem from engulfing Italy and Spain remains the key headwind for the banking sector, however, in spite of the technically underpinned retracement.
Bucking a three-session losing streak that took 5 percent off the STOXX Europe 600 Banks index , the sector ended up 1.4 percent, narrowing the year-to-date loss to 14.2 percent.
Supporting the bounce was the sector's 14-day Relative Strength Index, which ended the previous session at 26.5, with 30 or below considered oversold.
Beaten-down heavyweight BNP Paribas led the recovery, helping the sector contribute around a quarter of the gains for the FTSEurofirst 300 , which ended up 0.8 percent at 1,076.88 points.
No longer in a banking crisis, "we're in a political crisis", Robert Quinn, chief European strategist at credit rating agency Standard & Poor's said, adding he was bearish heading into the meeting and saw the potential for further sector losses.
Quinn said the solution was to bite the bullet and fully fund Greece, and by precedent Ireland and Portugal, at the lowest conceivable rates to allow them to achieve a primary surplus in the quickest time.
"Private sector involvement (PSI) is clogging up painfully slow political developments. If we don't drag market attention away from Italy and Spain then there will be far greater costs associated, including a most likely global recession and a 20 percent downturn in global equity markets," Quinn said.
The recent sector stress test showed European banks had 1 trillion euros ($1.42 trillion) in equity capital and so could absorb the hit from an unfavourable PSI decision: "They just can't cope with the current liquidity crisis," Quinn said.
With a meeting of European leaders on Thursday, senior officials will meet on Wednesday to discuss detailed proposals, although German Chancellor Angela Merkel on Tuesday played down hopes for a comprehensive solution.
A pullback in risk premia on Italian and Spanish government bonds helped ease some political pressure and buoy domestic lenders, with UniCredit ending up 4.7 percent, although yields remain high.
Earnings from the Nordic region's biggest bank, Nordea , also helped sector sentiment. The bank rose 5.7 percent after its in-line results nixed recent fears the numbers would come in light.
MIXED EARNINGS
Earnings elsewhere in the market gave a mixed outlook for investors keen to see sustained macroeconomic recovery in the second half, while lack of political agreement in raising the U.S. debt ceiling was also weighing on sentiment.
Wildly divergent outlooks pushed Swedish engineer Alfa Laval
and home appliance maker Electrolux
Alfa Laval ended up 6.5 percent in volume around two and a half times its 30-day daily average after saying it saw demand remaining strong into the third quarter.
Electrolux, meanwhile, slid 15 percent to a two-year low in volume around eight and a half times its 30-day daily average after warning the second half would be worse than in 2010, hit by weak demand and higher raw materials costs.
The mixed results pattern mirrored earnings in the U.S., where financial heavyweight Goldman Sachs lagged, but IBM beat forecasts after the market close on Monday.
While the latter's results buoyed tech shares in Europe and helped keep U.S. indices in positive territory by the European close, uncertainty around the political will to agree a deal to raise the debt ceiling was still a drag on sentiment.
We "need to see some clarity on the EU sovereign and U.S. debt ceiling events to buy into the rally," Atif Latif, director of trading at Guardian Stockbrokers, said (Additional reporting by Joanne Frearson; Editing by David Hulmes) ============================================================ For rolling updates on what is moving European shares please click on ============================================================ For pan-Europeanmarket data and news, click on codes in brackets: European Equities speed guide................... FTSEurofirst 300 index.............................. STOXX Europe index.................................. Top 10 STOXX sectors........................... Top 10 EUROSTOXX sectors...................... Top 10 Eurofirst 300 sectors................... Top 25 European pct gainers....................... Top 25 European pct losers........................
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