Nov. 1 (Bloomberg) -- European stocks rallied, sending the Dow Jones Stoxx 600 Index to its biggest weekly gain since 2001, as money markets began to unfreeze and central banks from the U.S. to Japan cut interest rates to revive economic growth.

Standard Chartered Plc, UBS AG and Lloyds TSB Group Plc climbed at least 19 percent as short-term borrowing costs between banks declined in Europe, the U.S. and Asia. Xstrata Plc surged 36 percent and Total SA climbed 19 percent after rate reductions from the Federal Reserve, Bank of Japan and the People's Bank of China boosted commodities and eased concern the global economy is headed for a prolonged recession.

``What governments did diminished the systemic risk,'' said Lionel Heurtin, a Paris-based money manager at Ofi Asset Management, which oversees about $22 billion. ``Valuations are low. Stocks are interesting if you buy for the long term.''

Europe's Stoxx 600 advanced 12 percent to 222.07 this week, the biggest gain since September 2001. The rally pared the measure's October decline to 13 percent, still the steepest monthly drop since September 2002.

The Stoxx 600 was valued on Oct. 27 at 7.9 times its companies reported earnings, the cheapest level since at least January 2002, according to data compiled by Bloomberg. The European equity benchmark has tumbled 39 percent in 2008, poised for a record annual drop, as a jump in U.S. mortgage defaults saddled global banks with more than $684 billion of losses and caused credit markets to lock up.

National Benchmarks

National benchmark indexes climbed this week in all 18 western European markets except Iceland. Germany's DAX rallied 16 percent, led by a 137 percent surge in Volkswagen AG. France's CAC 40 advanced 9.2 percent, while the U.K.'s FTSE 100 increased 13 percent.

Standard Chartered, the U.K.'s third-largest bank, climbed 34 percent and UBS, the biggest bank in Switzerland, added 24 percent. Lloyds TSB, the U.K. lender that agreed to buy HBOS Plc, rose 19 percent.

The cost of borrowing dollars for three months in London fell 49 basis points this week to 3.03 percent, capping the first monthly decline since May, according to the British Bankers' Association. Rates on comparable euro loans dropped 16 basis points to 4.76 percent, while the three-month rate for U.S. dollar loans in Singapore slid 43 basis points to 3.09 percent.

The decline in rates signals as much as $3 trillion of emergency funds provided by governments to alleviate the credit crisis may be working.

Rate Cuts

The Bank of Japan cut its benchmark overnight interest rate this week by 20 basis points to 0.3 percent, while the Fed lowered its target rate 50 basis points to 1 percent. The Fed also began buying commercial paper from companies and agreed to pump $120 billion into Brazil, Mexico, South Korea and Singapore to help alleviate demand for dollar-based funding.

European Central Bank policy makers meet Nov. 6, when they will probably reduce the region's main refinancing rate a half point to 3.25 percent, a Bloomberg survey of economists showed.

Interest-rate cuts this week helped fuel a rebound in commodities, sending the Reuters/Jefferies CRB Index of 19 raw materials to a 2.8 percent gain, the first advance in five weeks.

Xstrata, the world's fourth-biggest nickel producer, advanced 36 percent. Total, Europe's third-largest oil company, climbed 19 percent.

Volkswagen surged 137 percent after Porsche SE said it may increase its stake in Europe's biggest carmaker to 75 percent, prompting traders who had wagered on declines in Volkswagen stock to buy back shares to close out their bets. Porsche added 51 percent on speculation the sports-car maker will profit from Volkswagen's surge.

Volkswagen

The rally in Volkswagen sent a measure for automotive companies in the Stoxx 600 to a 62 percent gain, the best performance among 19 industries. All groups advanced this week.

October's sell-off erased more than $9 trillion from the value of stocks worldwide, almost one-third of the total value lost this year.

Iceland was the worst-performing European market last month following the collapse of the nation's largest banks. The OMX Iceland ICEX 15 plunged a record 81 percent, the biggest drop among 89 benchmark indexes monitored by Bloomberg worldwide.

``It was a difficult month,'' said Benoit de Broissia, an equity analyst at KBL Richelieu Gestion in Paris, which oversees about $5.1 billion. ``There was a lot of volatility.''

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: November 1, 2008 04:28 EDT