European shares inched higher in early trading on Monday, as mergers and acquisitions fever helped the market extend the previous session’s sharp rally.

Shares in UK insurer Friends Life surged 7.9 per cent after rival Aviva agreed terms on a possible deal to buy it for £5.6 billion ($8.8 billion). Aviva stock slipped 3.7 per cent.

Bucking the trend, shares in Petrofac Ltd sank 24 per cent after the oil and gas services firm unveiled profit targets well below analyst forecast, highlighting how the sector is struggling with plummeting crude oil prices.

At 0848 GMT, the FTSEurofirst 300 index of top European shares was up 0.2 per cent at 1,388.15 points.

The index surged 2.1 per cent on Friday, a sharp rally sparked by dovish comments from the European Central Bank President, Mario Draghi, and a surprise interest rate cut in China.

The prospect of further measures from the ECB to support the region’s economy continued to weigh on the euro on Monday, falling to near 28-month lows below $1.24 against the dollar. The single currency has fallen nearly 12 per cent since early May, a slide seen as positive for European exporters' earnings.

For Jean-Louis Cussac, the head of Paris-based firm Perceval Finance, the market is currently driven by central banks.

“Fund managers have not been selling equities during the recent pull-backs because of the ‘ECB put’: if the situation worsens, the central bank is ready to take further steps,’’ he said.

“The market remains volatile, and investors should be cautious. Despite the rise, there’s no significant buying interest, no real inflows. I still recommend playing this market via options.’’

Around Europe, UK’s FTSE 100 index was down 0.04 per cent, Germany’s DAX index up 0.2 per cent, and France’s CAC 40 up 0.6 per cent. The euro zone’s blue-chip Euro STOXX 50 index was up 0.7 per cent.

The FTSEurofirst 300 index of top European shares has surged 14 per cent since a low hit in mid-October, lifted by expectations of further measures by the ECB to support the euro zone economy, as well as by a recent raft of M&A deals.

Global M&A activity in 2014 has hit a level not seen in seven years, according to Thomson Reuters data, with a flurry of deals in the struggling oil and gas sector as a plunge in crude oil prices below $80 a barrel has sparked the biggest consolidation wave in the sector since the 70’s.

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