Rentokil Initial, Royal Ahold and ABN Amro surged on speculation they may become takeover targets. Nestle, the world's largest food maker, climbed after it agreed to pay drug maker Novartis $2.5bn for its medical nutrition unit.

"Few companies are now entirely out of the reach of potential buyers, " said Francois Bloch of Amas Bank in Geneva. "There is a lot of liquidity in the market.

The premiums that are paid for takeovers are rising.

That's good for stocks."

The Dow Jones Stoxx 600 index climbed 2.8% to 366.16, the biggest weekly gain since 28 July. The measure rose in each session over the last two weeks, capping the longest winning streak since February 1997. The Stoxx 50 increased 2.8%, while the Euro Stoxx 50 jumped 3%.

Rentokil shares rose 5.7% on speculation the world's biggest pest control company may be the target of a takeover approach by a private-equity bidder, said Laurent Brunelle, an analyst at Exane BNP Paribas in Paris.

Ahold, the Dutch owner of the US Stop & Shop and Giant supermarket chains, jumped 9.7% on speculation that the grocer may be bought. Clayton Dubilier & Rice and Kohlberg Kravis Roberts are reported to be considering a joint bid for Ahold's US Foodservice unit, a division valued at as much as $6bn.

ABN Amro rose 7.1% on speculation the largest Dutch bank may be taken over or merge with another bank, according to Cor Kluis, an analyst at Rabo Securities.

Nestle increased 4.1% after it agreed to buy Novartis's nutrition unit to tap growing demand for hospital meals. Novartis, Switzerland's biggest drugmaker, gained 3.8% on optimism the proceeds from the sale will help the company bring new treatments to market.

Tele2 paced an advance in telecommunications stocks.

Sweden's second-biggest phone company surged 9% after Goldman Sachs lifted its recommendation to 'neutral' from 'sell'.

France Telecom gained 7%. Europe's second-largest phone company expects to complete 45% of a threeyear plan to cut jobs by the end of this year.

BT, the UK's largest phone company, increased 7.9%. The company said fullyear operating profit at its retail unit will increase more analysts expect on rising sales.

Deutsche Telekom, Germany's former phone monopoly, added 4.3%.

Corus climbed 6.2% after CSN of Brazil raised its offer for the UK's largest steelmaker to £4.9bn ( 7.3bn). Prudential gained 3.6% after the insurer rejected a possible bid for its Egg internet bank.

Johnston Press plunged 10%. The publisher of regional newspapers, including the Leinster Leader and Kilkenny People, said there was "no discernible improvement" in advertising in the second half. Advertising revenue for the five months to 30 November fell 8%.

Bloomberg