Oct. 29 (Bloomberg) -- European stocks gained for a second day as falling credit costs spurred a rally in financial shares, while higher commodity prices pushed up oil and metals producers.

Royal Bank of Scotland Group Plc, Allianz SE and Axa SA jumped more than 10 percent as money-market rates dropped in Europe, the U.S. and Asia. Daimler AG surged 21 percent after Merrill Lynch & Co. said the carmaker's shares were ``oversold'' following a 45 percent slump this month. Rio Tinto Group climbed 19 percent as copper advanced for a third day, while Royal Dutch Shell Plc rose 12 percent after oil gained more than $5 a barrel.

The drop in money-market rates ``shows that the system is beginning to unclog,'' said Charles Mackinnon, chief investment officer at London-based Thurleigh Investment, where he manages the equivalent of $256 million. ``That will eventually lead to less volatility in markets and that will bring us out of this slump.'' He spoke in a Bloomberg Television interview.

Europe's Dow Jones Stoxx 600 Index climbed 7.2 percent to 213.72, the biggest gain since Oct. 13. All 19 industries advanced except for automakers as Volkswagen AG tumbled 45 percent.

The market extended early gains after China, the world's fourth-largest economy, cut interest rates for the third time in two months to stimulate growth. The Federal Reserve was expected to reduce its target for the overnight lending rate between banks by at least half a percentage point to 1 percent after European markets close today, according to futures traders and economists surveyed by Bloomberg.

National Benchmarks

More than $11 trillion has been erased from the market value of equities worldwide this month, accounting for about one-third of the total value wiped off stocks this year, as $681 billion of writedowns and losses by banks triggered a freeze in credit markets. The Stoxx 600 has retreated 17 percent since the end of September, poised for its worst monthly decline since the October 1987 crash.

National benchmark indexes climbed all of the 18 western European markets except for Germany. The U.K.'s FTSE 100 added 8.1 percent. France's CAC 40 increased 9.2 percent. Germany's DAX lost 0.3 percent, dragged down by Volkswagen.

Royal Bank of Scotland, the U.K.'s fourth-largest lender, climbed 13 percent to 64 pence. Allianz, Europe's biggest insurer, rallied 26 percent to 60.85 euros. Axa, the region's second-largest insurer, jumped 18 percent to 14.15 euros.

Efforts by governments and central banks worldwide to bail out banks and cut borrowing costs are showing signs the paralysis among lenders is easing.

Libor

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 5 basis points to 3.42 percent, its 13th straight drop. The rate is down 140 basis points since Oct. 10. The comparable euro rate fell 2 basis points to 4.83 percent, the 15th consecutive decline, and losing lost 56 basis points since Oct. 8, BBA data showed.

Hong Kong's three-month interbank offered rate, or Hibor, declined 30 basis points today, the most in a week, on prospects for rate cuts.

European Central Bank President Jean-Claude Trichet said Oct. 27 the bank may cut rates next week as the financial crisis damps inflation.

``Europe is snapping back on the sharp rise in Wall Street last night from incredibly oversold levels and in anticipation of interest-rate cuts,'' said Nick Brind, a London-based money manager at New Star Asset Management, which oversees about $25 billion.

Rio Tinto Group, the third-biggest mining company, rose 19 percent to 2,677 pence. BHP Billiton Ltd., the world's largest, gained 14 percent to 960 pence.

Copper for delivery in three months climbed as much as 14 percent to $4,670 a metric ton, extending yesterday's 2.7 percent gain.

Shell, Daimler

Shell, Europe's largest oil company, advanced 12 percent to 1,705 pence. Total SA, the region's third-biggest, added 14 percent to 42.825 euros.

Crude for December delivery climbed as much as $6.18, or 9.9 percent, to $68.38 a barrel in New York.

Daimler surged 21 percent to 23.50 euros after Merrill upgraded the stock ``buy'' from ``neutral.''

``Any improvement in the macro outlook, debt market outlook, or even any progress on a further Chrysler disposal could lead to some bounce-back in Daimler shares,'' London-based analyst Harald Hendrikse wrote in a note to clients today. ``Daimler shares are discounting a lot.''

Daimler's relative strength index, a technical measure used by some analysts to predict moves, closed at 27.46 yesterday. A reader below 30 indicates the stock may rise, according to the analysts.

Volkswagen Plunges

Volkswagen tumbled 45 percent to 517 euros after its biggest shareholder, Porsche SE, said it will take steps to increase the supply of stock after a so-called short-squeeze spurred a fourfold rally in the past two days.

Porsche, which said Oct. 26 it has options equivalent to 31.5 percent of Volkswagen's common stock ``to hedge against price risks,'' may settle as much as 5 percent of those options, it said in a statement today.

``Porsche SE intends -- depending on the state of the market -- to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares,'' the carmaker said in a statement to the German stock exchange today. ``This may result in an increase in the liquidity of the Volkswagen ordinary shares,'' said Porsche, the maker of 911 sports cars.

Porsche soared 37 percent to 63.05 euros.

Deutsche Boerse AG, operator of the Frankfurt stock exchange, said late yesterday it will reduce Volkswagen's weighting in the benchmark DAX index to 10 percent after the stock's surge.

Bayer AG surged 13 percent to 43.44 euros. Germany's largest drugmaker confirmed its sales and earnings forecast for the year, even as profit missed analysts' estimates.

To contact the reporters for this story: Sarah Thompson in London at sthompson17@bloomberg.net;

Last Updated: October 29, 2008 13:07 EDT