European shares rise, shrugging off Spain downgrade

European equities advanced by midday on Monday, brushing off a downgrade to Spain's sovereign credit rating, though the region's stocks were headed for their worst monthly losses in 14 months on euro zone's debt problems.

By 1033 GMT, the FTSEurofirst 300 index of leading European shares was up 0.3 percent at 1,000.66 points as trading was subdued with the UK and the U.S. markets closed for holiday.

The pan-European index is down 5.8 percent this month, on track for its worst monthly percentage loss since February 2009.

Fitch Ratings cut Spain's debt rating by one notch to AA-plus with a stable outlook after European markets closed on Friday, pulling Wall Street lower.

The move by Fitch had largely been priced in by the markets, though Spain's Ibex 35 fell 0.7 percent, with Banco Santander down 0.8 percent and BBVA falling 1.6 percent. Standard & Poor's downgraded Spain's ratings by one notch to AA with a negative outlook on April 28.

The downgrade "was a following up of what we knew already. It was not as sanguine as the S&P was" said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.

"The market is still wary of the situation and the euro remains under pressure."

The euro recovered slightly on Monday but it remained on the back foot as the downgrade served as a reminder about the euro zone debt crisis.

Across Europe, Germany's DAX put on 0.4 percent and France's CAC 40 added 0.1 percent.

Over the weekend, France admitted that keeping its top-notch credit rating would be a stretch without some tough budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit.

Meanwhile, European Central Bank Governing Council member Axel Weber said the European Union needed stricter mechanisms for monitoring member states that receive financial aid from others, and a bankruptcy procedure should be looked at.

Aiding sentiment on Monday, the Business Climate Indicator for the euro zone improved slightly in May, suggesting economic activity in industry would continue to recover in the coming months.

The VDAX-NEW volatility index, a gauge of investor risk appetite or aversion, eased 0.3 percent. The lower the volatility index, which is based on sell- and buy-options on Frankfurt's top-30 stocks, the higher is investor's appetite for risky assets such as equities.

European markets were little impacted as tensions spread across the Middle East after the Israeli navy boarded ships in an aid convoy, some flying Turkish flags, and killed more than a dozen people. Turkish shares fell more than 2 percent.

BP shares in Frankfurt shed 7.8 percent after its latest attempt to plug an oil leak in the Gulf of Mexico failed. U.S. government and BP officials warned the leak from the blown-out oil well may not be stopped until August.

With the oil sector, it was mixed. Royal Dutch Shell rose 0.6 percent, while Total fell 0.4 percent.

Among other individual movers, Finmeccanica put on 2.1 percent. The Rome prosecutor's office denied it was probing the Italian defence and aerospace company in a money-laundering investigation.