UK steelmaker Corus and Spain's Banco Bilbao Vizcaya Argentaria gained as investors bet they may be bought. Air France-KLM led airlines higher as crude oil fell below $60 a barrel.

Tesco jumped after reporting record earnings.

The Stoxx 600 added 1.2% to 345.55 in the week, closing at the highest since 5 June 2001. The Stoxx 50 rose 1.4% while the Euro Stoxx 50 for the 12 nations sharing the euro climbed 1.1%.

Corus jumped 24% in the week, leading gains in the Stoxx 600. Tata Steel, India's second-largest, said on Thursday it was "evaluating" acquisition opportunities globally, including Corus.

Citigroup, the biggest US bank by assets, is considering four European banks as possible takeover targets, French daily La Tribune said on Wednesday.

The possible targets are BBVA and Britain's Barclays, as well as BNP Paribas and Societe Generale of France.

BBVA, Spain's second biggest bank, climbed 4.2%.

Barclays, the UK's thirdlargest lender by market value, increased 3.6%. BNP Paribas, France's largest, added 2.4%. Societe Generale rose 0.9%.

So far this year, a record $1.3 trillion has been spent on European mergers and acquisitions, compared with $819bn for the same period last year.

"Support from takeovers will be sustained, " said Karsten Stroh, head of equities at JP Morgan Asset Management in Frankfurt.

"One has to make sure that prices paid don't go through the roof, but it's looking alright at the moment."

Viridian Group, Northern Ireland's main power supplier, surged 23%.

Arcapita Bank BSC, a Bahrain-based buyout firm, said on Friday it agreed to buy it for £1.62bn, seeking a haven from falling stock markets in the Middle East.

Aer Lingus, which started trading officially on Monday, soared 20%. On Thursday Ryanair offered to buy it for 1.48bn to expand its Irish operations. Ryanair rose 4.3%. Air France, Europe's biggest carrier, gained 3.8%.

British Airways, the region's third-largest, advanced 2.6%.

New York oil prices closed at a seven-month low of $58.68 a barrel on Tuesday, tumbling 23% since their 2006 high on 14 July as concern about supply shortfalls eased. November futures lost 6% in the week.

Energy stocks dropped.

Statoil, Norway's biggest oil and gas company, lost 2.1%.

BP, which said on Wednesday that production fell for a fifth consecutive quarter, dropped 1.6%.

Stocks gained on Thursday even as the European Central Bank lifted its benchmark rate by a quarter point to 3.25% to keep inflation in check as the economy accelerates.

Tesco, the UK's biggest retailer, added 5.6% after saying first-half profit increased 23% as it cut prices to stay ahead of resurgent competition.

Internet-gambling shares incurred the biggest losses last week. PartyGaming, the world's biggest internet poker company, slumped 61%.

Sportingbet, which owns the Paradise Poker site, tumbled 62%, leading losses in the Stoxx 600. NETeller plummeted 49%.