By Sruthi Shankar and Bansari Mayur Kamdar
(Reuters) -European stocks reversed sharp early losses and rose on Monday as banking stocks rebounded from three-month lows sparked by UBS' shotgun deal to buy Credit Suisse (SIX:CSGN) for a fraction of its market value.
The pan-European STOXX 600 index gained 1.0% by the close, after having fallen nearly 2% earlier in the day.
Banking shares rose 1.3% after UBS Group's state-backed takeover of Credit Suisse appeared to close off one source of worry for the global banking sector.
"The fact that the takeover by UBS has happened so swiftly, that the bank didn't collapse and it was a corporate takeover as opposed to a governmental or regulatory bailout has obviously made markets feel a little better about the situation for the banking sector," said Danni Hewson, head of financial analysis at AJ Bell.
Credit Suisse shares slumped 55.7% after rival UBS said it will pay 3 billion Swiss francs ($3.23 billion) for the 167-year-old bank and assume up to $5.4 billion in losses.
Shares of UBS rose 1.3% after falling as much as 16% in a volatile session.
Lender-heavy indexes of Spain and Italy added 1.3% and 1.6%, outperforming regional peers.
Investors were still concerned by news that Credit Suisse's additional tier-1 bonds - or AT1 bonds - with a notional value of $17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders.
"We are surprised how they are going about this AT1 capital," said Teeuwe Mevissen, senior macro strategist at Rabobank.
"If you look at the seniority of both, equity holders should be the first ones to lose their money. Now doubt has been cast on this principle ... markets participants are confused and the decision comes with a lot of uncertainty."
Miners led sectoral gains on Monday, advancing 2.8% tracking firm copper prices on a weakening dollar and signs of improving demand from top consumer China.
Meanwhile, ECB President Christine Lagarde said financial market turbulence will not stand in the way of the European Central Bank's fight against inflation as it has separate tools to fight both issues.
All eyes will be on the Federal Reserve's policy decision on Wednesday, with traders largely divided on whether the U.S. central bank will hike interest rates by 25 basis points or leave it unchanged.
The benchmark STOXX 600, which racked up a 10% year-to-date gain at one point, is up just 3.7% so far this year after the collapse of Silicon Valley Bank and Signature Bank and troubles at Credit Suisse fuelled worries about the health of the global banking system.