July 23 (Bloomberg) -- European stocks rose to the highest this month as oil retreated, concerns eased that bank losses will expand and better-than-estimated earnings from Volkswagen AG and PSA Peugeot Citroen lifted automakers.

Air France-KLM Group and DSG International Plc led gains in airlines and retailers after oil fell below $127 a barrel. UBS AG and HSBC Holdings Plc helped send a gauge of bank shares to the biggest rally in four months after Deutsche Bank AG said yesterday that financial firms are overcoming credit losses. STMicroelectronics NV jumped after Europe's largest maker of semiconductors forecast higher sales.

The Dow Jones Stoxx 600 Index added 2.1 percent to 286.77, as 16 of 18 industry groups advanced. The index has rebounded 7.6 percent from a three-year low on July 15 after companies from Volkswagen to Nokia Oyj and Citigroup Inc. signaled they were able to withstand the economic slowdown.

``There are still some reassuring elements'' in the market, said Amandine Gerard, a Paris-based fund manager at Richelieu Finance which oversees $6.2 billion. ``Oil declining is the first. The market was also very worried about earnings at banks. All have reassured about solvency.''

Record oil prices, accelerating inflation and more than $467 billion in credit-related losses worldwide have threatened to stifle economic and profit growth, dragging down the Stoxx 600 by 21 percent this year. The retreat sent the price-to-earnings ratio on the index to 11.2, near the cheapest since at least 2002, according to weekly data compiled by Bloomberg.

Investor Confidence

Crude oil futures declined after a U.S. government report showed inventories of gasoline and distillate fuels gained. The contract for September delivery sank as much as 2.4 percent to $125.31 a barrel in New York and recently traded at $126.65. Oil dropped 2.6 percent yesterday.

``The more the oil price falls the more confident you can become that inflation will be reduced and interest rates will come down,'' said Jane Coffey, head of equities at Royal London Asset Management, which oversees about $63 billion.

National benchmark indexes advanced in all 18 western European markets except Norway. The U.K.'s FTSE 100 rose 1.6 percent, while France's CAC 40 climbed 1.9 percent. Germany's DAX increased 1.5 percent.

Air France, Europe's biggest airline, added 6 percent to 16.90 euros. British Airways Plc, the region's third-largest, jumped 6.9 percent to 263.25 pence.

Quelling Fears

DSG, the U.K.'s biggest consumer-electronics retailer, climbed 8.3 percent to 49 pence. Debenhams, the second-largest U.K. department-store company, surged 13 percent to 45.75 pence.

UBS, the European bank hardest hit by the subprime contagion, gained 6 percent to 23.3 francs. HSBC, Europe's biggest bank by assets, rose 3.7 percent to 843.25 pence. The Europe Stoxx Banks Index added 6.1 percent.

Deutsche Bank analyst Mike Mayo said yesterday bank losses haven't spread as ``much as feared'' and that he's less ``negative'' on bank earnings.

Financial firms have led the rout that has erased about $13 trillion in value from global equities since October as credit losses and asset writedowns by the subprime-mortgage market's collapse spread, curbing the outlook for profit growth.

Better-than-expected earnings from Bank of America Corp., Citigroup and JPMorgan Chase & Co., along with expectations the U.S. Congress will approve a rescue plan for Fannie Mae and Freddie Mac, have sparked a rally in global financial stocks in the past week.

HBOS Speculation

Royal Bank of Scotland Group Plc, the second-largest U.K. bank, climbed 11 percent to 221.25 pence today after U.S. lawmakers reached a deal on legislation aimed at alleviating the housing recession and bolstering Fannie Mae and Freddie Mac, the biggest mortgage-finance companies. The U.S. Congress may vote today on the bill.

The MSCI World Financials Index has climbed 17 percent in six days after closing at the lowest since 2003 on July 15.

HBOS Plc jumped 17 percent to 305 pence amid speculation Spain's Banco Bilbao Vizcaya Argentaria SA may consider buying the U.K.'s biggest mortgage lender.

``There are rumors that BBVA is looking at buying HBOS,'' said Mamoun Tazi, an analyst at MFGlobal Securities Ltd. in London who has a ``neutral'' recommendation on the stock. ``BBVA is better off looking at regions where it can achieve significantly higher returns on assets.''

A spokesperson for BBVA and HBOS spokesman Shane O'Riordain both declined to comment.

Separately, Goldman Sachs Group Inc. added the mortgage lender to its ``conviction buy'' list.

Peugeot, Fiat

Volkswagen advanced 6.9 percent to 209.55 euros. Europe's largest carmaker said second-quarter profit rose 35 percent to 1.64 billion euros ($2.58 billion) on sales of the Tiguan compact sport-utility vehicle and new car models. Seven analysts surveyed by Bloomberg News had estimated profit of 1.29 billion euros. Sales gained 4.5 percent to 29.5 billion euros.

Peugeot jumped 9.2 percent to 34.90 euros after Europe's second-biggest carmaker reiterated its 5 percent sales growth target and 3.5 percent operating-margin goal for the full year.

The company posted a 49 percent increase in first-half profit to 733 million euros, aided by cuts in production costs and buoyant demand for its new 308 compact and 207 small car. Analysts had expected net income of 674 million euros.

Fiat SpA gained 14 percent to 11.86 euros. Italy's largest manufacturer said second-quarter profit rose 1.9 percent to 604 million euros as higher sales in Brazil offset a slump in its home market. That beat the median forecast of 594 million euros in a Bloomberg survey.

STMicroelectronics

Analysts estimate earnings for companies in the Stoxx 600 will drop 2.4 percent in 2008, Bloomberg data show. That's down from 11 percent growth predicted at the start of the year.

STMicroelectronics advanced 6.3 percent to 7.19 euros. The chipmaker forecast third-quarter revenue that met analysts' estimates, bolstered by sales of chips used in mobile devices.

Friends Provident Plc and Standard Life Plc led insurance companies higher after Goldman Sachs Group Inc. rated the stocks ``buy'' in new coverage.

The brokerage also added Friends Provident, a 176-year-old British insurer, to its ``conviction buy'' list. The shares jumped 13 percent to 90.6 pence. Standard Life increased 7.1 percent to 232.5 pence.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

Last Updated: July 23, 2008 12:31 EDT