* FTSEurofirst 300 +1.1 pct, Euro STOXX 50 +2.1 pct
* Medium-term technical outlook still negative -chartist
* Best to buy options calls, not yet stocks -Natixis AM
* Half of euro zone blue chips trade below book value
By Blaise Robinson
PARIS, Sept 13 (Reuters) - European stocks ended higher on Tuesday, staging a rally from two-year lows hit in morning trade led by recovering banks, but a sharp rise in Italy's borrowing costs and simmering fears of a Greek debt default kept gains in check.
The FTSEurofirst 300 index of top European shares ended 1.1 percent higher at 900.43 points, after sinking as low as 878.09 in morning trade, a level not seen since mid-2009.
Banking stocks -- stuck in a seven-month downtrend in which
the sector index has lost nearly 50 percent -- bounced
back in what was mostly seen as a technical rally, with Societe
Generale rising 15 percent and Deutsche Bank
"Despite today's move, charts still show a negative bias for indexes on the medium term ... As soon as the gap left open on Monday is filled, indexes will resume their slide," Vincent Ganne, technical analyst at TradingSat, said.
"The question is not 'if' indexes will revisit March 2009 lows, but 'when'," Ganne said. "Is it going to happen in the next two weeks or in December? Hard to say."
The roller-coaster session had started in positive territory, with stocks rallying on reports Italy had asked China to make "significant" purchases of Italian debt, later denied by an Italian ministerial source.
Then the market turned red, with French banks plummeting on renewed talk over funding problems, while results from Italy's debt auction -- at which the country had to offer record yields to sell its bonds -- revived fears over contagion from the Greek debt crisis.
Stocks later started to drift higher as it emerged that Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel would hold a conference call on Wednesday, spurring hopes of further political support for the debt-stricken country.
"The key is to stay very flexible tactically because the whole market reacts like a global macro hedge fund," said Franck Nicolas, head of global asset allocation at Natixis AM, which has 298 billion euros ($406 billion) of assets under management.
"One of the only ways we see at the moment to increase the exposure to equities is by buying option calls, and not stocks directly."
BELOW BOOK VALUE
Around Europe, the UK's FTSE 100 index ended up 0.9 percent, Germany's DAX index gained 1.9 percent and France's CAC 40 rose 1.4 percent.
So far this year, the FTSEurofirst 300 is down 20 percent, the FTSE 100 down 12 percent, the DAX down 25 percent and the CAC 40 down 24 percent, dragging valuation ratios to levels not seen since the heat of the financial crisis in early 2009.
According to Thomson Reuters data, about half of the stocks in the Euro STOXX 50 , the CAC 40, Spain's IBEX , Italy's FTSE MIB and about a third of the stocks in the DAX trade below their book value, or the value of the companies' net assets.
But despite historically cheap valuation ratios, fund managers are not rushing to scoop up battered shares.
According to a Bank of America Merrill Lynch survey, 55 percent of European fund managers see Europe suffering two quarters of negative GDP growth over the next 12 months, compared with only 14 percent in July.
"The message coming from (the survey) is that unless you feel more confident about European banks then it's difficult to invest in Europe. The survey shows that sentiment on Europe is now so negative that contagion risk to the rest of the world has risen significantly," said Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research.
Gerry Fowler, head of equity and derivative strategy at BNP Paribas, recommended a contrarian trading strategy to capture value amid the recent market turmoil.
"Right now everyone is extremely short term-focused and macro-driven; the best thing you can do is be long-term-focused and micro-driven," Fowler said.
The bottom-up, structural growth trade would most likely outperform as the market prices in a sustained period of lower growth, he said, citing battery makers, robotics, medical technology and sectors exposed to the emerging market consumer as solid bets. (Additional reporting by Simon Jessop in London; Editing by David Holmes)
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