LONDON: European stock markets rallied on Monday, with London nearing 5,000 points for the first time in nearly a year after Asian equities powered higher on growing optimism for the global economy.

In morning trade here, London's benchmark FTSE 100 index of leading shares was up 0.71 percent at 4,885.51 points after a brief rise above 4,900 points.

Frankfurt's DAX 30 added 0.58 percent to 5,494.63 points and in Paris the CAC 40 gained 0.63 percent to 3,638.68 points.

The DJ Euro Stoxx 50 index of leading eurozone shares won 0.83 percent to 2,768.40 points.

On the foreign exchange market, the European single currency fell to 1.4299 dollars.

"The real question is: are these (stock) gains sustainable?" said Joshua Raymond, market strategist at financial betting firm City Index.

"The FTSE has now rallied 40 percent since early March which is quite a turnaround and momentum is likely to be the key again this week. The markets are continually looking like pricing in a V shaped recovery but the next 30-40 days will be crucial.

"The next month or so will help to identify whether a recovery is to V or W shaped. If it's the latter, there could be a mini correction in store but considering the momentum the market has right now, you are going to have to be quite brave to trade against the trend," added Raymond.

Asian stocks rallied on Monday, tracking strong gains on US and European markets ahead of the weekend as optimism mounted that the global economy was getting back on its feet after the worst recession in decades.

The upbeat start to the week came after stocks rose to fresh 2009 highs across Wall Street on Friday in response to bright housing data and Federal Reserve chief Ben Bernanke's comments that global recovery prospects "appear good."

Tokyo soared 3.35 percent by the close on Monday, Hong Kong jumped 1.67 percent, Shanghai won 1.10 percent and Sydney rallied to end up 3.16 percent.

Signs that the Chinese market is stabilising after recent sharp falls sparked by fears of overheating calmed investors' nerves across the region.

"The bubble in the (Shanghai) market valuation has been corrected to a degree," said Great Wall Securities analyst Zhang Yong.

Asian investors took their cue from Wall Street where the Dow Jones Industrial Average surged 1.67 percent on Friday to finish at 9,505.96, posting a fourth straight daily gain. The blue-chip index had not finished above 9,500 since early November and has now climbed about 45 percent from its March low.

"This is a new wave of optimism," IG Markets institutional dealer Chris Weston told Dow Jones Newswires. "There's no way this momentum on Wall Street will just turn around."

Fed chairman Bernanke lifted spirits, telling a meeting of central bankers in Jackson Hole, Wyoming, that the global outlook for recovery from the worst slump in six decades appeared good.

"After contracting sharply over the past year, economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke said.

Figures showing existing-home sales in the United States surged 7.2 percent in July to a seasonally adjusted annual rate of 5.24 million units -- the largest gain since records began in 1999 -- poured more fuel on the rally.

The report "encouraged expectations of a US housing recovery", said NAB Capital analyst John Kyriakopoulos.

Economists say a recovery in the stricken housing sector, after a bubble collapsed three years ago, is key to pulling the world's largest economy firmly out of recession.