European shares climbed to a three-week high on Wednesday, staying on track to end the month in positive territory, with energy stocks racing higher on expectations of a deal to cut crude oil production to tackle oversupply.

The European oil and gas index rose 2 per cent as oil prices surged more than 5 per cent after an Iraqi delegate said that some form of deal would be reached at a Vienna meeting of members of the Organization of the Petroleum Exporting Countries (OPEC) to agree terms of a proposed production cut.

Energy companies helped the pan-European STOXX 600 to gain 0.3 per cent by 0902 GMT. It has risen by about 1 per cent in November after falling in the previous two months.

However, shares in state-backed British bank RBS fell 4.5 per cent after it failed the Bank of England's stress test of seven British lenders and was told to boost its capital buffers.

“RBS is still the weak link in the UK banking chain, almost a decade after the financial crisis came close to wiping the bank out,” said Hargreaves Lansdown senior analyst Laith Khalaf. "... Unlike most of its peers, RBS doesn't have the luxury of a dividend it can cut to support its capital position.”

December is set to be an uncharacteristically busy month for markets, with a referendum on constitutional reform in Italy on Sunday, followed by a UK Supreme Court ruling on whether the government can quit the European Union without an act of Parliament.

The European banking index was broadly flat. It is up nearly 3 per cent this month after advancing more than 8 per cent in October but remains down by about 14 per cent this year.

Italian banks surrendered early gains and were last down 0.3 per cent, with investors staying cautious ahead of Sunday's referendum, which has the potential to unseat Prime Minister Matteo Renzi.

Bets on falls in Italian stocks and demand for insurance against sovereign default have both picked up markedly this year on growing investor concern ahead of the referendum, data company HIS Markit said.

However, Jefferies is sticking with a contrarian bullish call on Italian stocks, echoing views from some other fund managers who believe that the expected failure of Renzi's constitutional referendum will offer buying opportunities as others flee.

The broader European equities market was also underpinned by some M&A news.

Linde shares advanced 7 per cent after the German industrial gases group received a fresh approach from US rival Praxair for a merger of equals.

Elsewhere, British packaging company RPC Group hit a record high and was last up 9.4 per cent, the biggest STOXX 600 gainer, after reporting a 53 per cent rise in first-half revenue.

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