* FTSEurofirst 300 index rises 1.4 pct
* UBS drops on potential Q3 loss
* Rally only seen short-term
By Joanne Frearson
LONDON, Sept 15 (Reuters) - European shares rose on Thursday after German and French leaders said they were determined to keep Greece in the euro zone, though Swiss bank UBS dropped sharply after it said a trader had lost around $2 billion in unauthorised dealing.
The rally was seen only as a short-term technical bounce, however, with Greece still needing to implement reform processes to meet fiscal goals and other peripheral euro zone nations also facing market ire.
Spain was the latest peripheral country to tap markets, in a bond auction on Thursday, and although its debt funding costs remain high, the auction was well bid at the top of the expected range, in contrast to the Italian auction earlier in the week.
"It is a strong statement that France and Germany has made of trying to keep Greece in the euro zone," Andrea Williams, who manages $2.1 billion in assets for Royal London Asset Management, said.
"It looks like they are buying time to put instruments in place to help absorb any losses. But Greece is not out of the woods yet, they still must implement the reforms and there is a risk the country could default."
Williams added that she was not prepared to change her underweight position in financials which she has had for the past four to five months after the news.
Greek credit default swaps showed investors were still worried about a potential default, with the cost to insure Greek government debt against default quoted at 60 points upfront.
UBS fell 4.8 percent after the bank said it had discovered the loss, by a trader in its investment bank, and warned it could post a third-quarter loss.
The news was not enough, however to knock Espirito Santo's "buy" rating off the Swiss bank.
The broker said it was maintaining its rating due to the bank's "strong Basel 3 capital adequacy, robust liquidity and low exposure to peripheral European risk."
By 0821 GMT, the pan-European FTSEurofirst 300 index of top shares was up 1.4 percent at 925.74 points after gaining 1.4 percent in the previous session on hopes of a plan for a common euro bond would help ease the regions debt crisis.
A common bond was not seen as an answer to the region's crisis, however, and Germany in the past has been opposed to such an introduction.
The index rose above its 50 percent Fibonacci retracement level from its March 2009 low to its February 2011 high or 918.53, but the FTSEurofirst 300 faced resistance at 982.97 its 38.2 percent Fibonacci retracement.
The index is still down 16.5 percent since late July as fears about a recession in the major economies have intensified and concerns about contagion in the euro zone sovereign debt crisis grown.
KINGFISHER RISES
Strong earnings were a main feature amongst the main movers in Europe. Kingfisher , Europe's No.1 home improvements retailer, rose 5.1 percent to become the top riser on the FTSE 100 after first-half results beat expectations.
Forecast-topping sales news also propelled Swedish budget
fashion group Hennes & Mauritz AB
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