LONDON, April 1 (Reuters) - European equities climbed to an 18-month closing high in thin trading on Thursday, led higher by financials, as encouraging economic figures from Asia, Europe and the United States boosted optimism for economic recovery.
Investor appetite for risky assets such as equities rose, with the VDAX-NEW volatility index .V1XI falling 3.5 percent. The lower the index, which is based on sell and buy options on Frankfurt's top-30 stocks, the higher the market's desire for risk.
The FTSEurofirst 300 .FTEU3 index of top European shares ended 1.4 percent higher at 1.094.05 points, the highest close since late September 2008. The index gained 7.1 percent in March, 3.1 percent in the first quarter and is up about 69 percent from its record low of March 2009.
Volumes on the index were 72 percent of the 90-day daily average, as Europe headed into the Easter holiday weekend.
Banks were the top gainers, with STOXX Europe 600 banking index .SX7P up 1.9 percent. HSBC (HSBA.L), Lloyds (LLOY.L), Royal Bank of Scotland (RBS.L), BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA) and UBS (UBSN.VX) rose 1.1 to 3.6 percent.
"The strong ISM data is boosting sentiment and in the short term, this is a supportive factor for the equity markets," said Tammo Greetfeld, equity strategist at UniCredit.
"However, if we look at a three-to-six month horizon, the economic sentiment indicators are likely to peak and in this environment, I expect the reward-risk ratio for equity investments to deteriorate," he added.
The U.S. manufacturing sector expanded in March at its fastest pace in more than five years, manufacturing activity in the euro zone grew at its fastest pace in over three years last month and China's vast manufacturing sector shifted gears during the month as orders climbed.
Data also showed the number of U.S. workers filing new claims for jobless benefits fell last week and a measure of underlying job market trends hit a 1-1/2 year low, strengthening views the labour market was close to turning.
"The manufacturing data shows there's momentum in the recovery and there's a strong message there," said Mike Lenhoff, head of research at Brewin Dolphin Securities. "And the recovery is good for earnings upgrades, so valuations are OK."
Stocks in the FTSEurofirst 300 trade at an average of 14.6 times earnings, according to Thomson Reuters data. The average price-to-earnings (P/E) ratio has been drifting lower since peaking at 15.9 in mid-January, following relatively strong corporate results.
INVESTORS CAUTIOUS
But investors remained cautious following comments by U.S. Treasury Secretary Timothy Geithner and after some poor economic data. Geithner said the unemployment rate in the United States, currently at 9.7 percent, will remain "unacceptably high" for some time to come. [ID:nN0198494]
German retail sales fell by a bigger-than-expected 0.4 percent month-on-month in February, suggesting that private consumption will drag on the export-fuelled recovery of Europe's largest economy. [ID:nLDE630055]
Miners were also in demand as copper MCU3 hit a 20-month high on signals of improving demand. BHP Billiton (BLT.L), Anglo American (AAL.L), Antofagasta (ANTO.L), Rio Tinto (RIO.L), Xstrata (XTA.L) and ENRC (ENRC.L) rose 1.8 to 4.1 percent.
Irish airline Ryanair (RYA.I), Europe's biggest low-cost carrier, jumped 8 percent after it raised its full-year profit forecast after bookings and yields beat its expectations in late February and March in the run up to the Easter holiday.
But drugs maker Orion (ORNBV.HE) fell 10.3 percent on news the U.S. Food and Drug Administration is evaluating data that may suggest the firm's key Parkinson's disease drug is tied to increased prostate cancer risk. (Additional reporting by Brian Gorman; Editing by Rupert Winchester)
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