By Danilo Masoni and Helen Reid
MILAN/LONDON (Reuters) - Banks powered European shares to their highest levels in more than a year, while volatility and safe-haven gold stocks slumped on Monday on abating political anxiety in the euro zone.
Investors cheered the first-round results of France's presidential election in which centrist Emmanuel Macron took a big step towards leading his country, with polls now putting him comfortably ahead of far-right leader Marine Le Pen in the May 7 run-off.
The outcome lessens the risk of an anti-establishment shock on the scale of UK's vote to quit the European Union and bolsters the case for closer ties between France and Germany.
Europe's STOXX 600 index was up 2.1 percent by 1140 GMT, while Britain's FTSE added 1.8 percent and Germany's DAX hit a new record high, up 3 percent.
"The clear reason for this rally is that European markets have been held back by political risk over the last 12 months," said Tim Stevenson, European equities fund manager at Henderson.
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Europe's main gauge of equity market anxiety, the Euro STOXX 50 Volatility index fell 7 points, wiping out the rapid surge it made this month when investors grew cautious in the run up to the French vote.
The euro briefly vaulted to five-month peaks, and French bond yields fell to multi-month lows, halving the French/German two-year bond spread.
Investors called for the market's focus to return to signs of improvement in European economies.
"We decided early this morning to refocus our strategy on the very positive fundamentals in Europe, and to lift the protective overlays we had put in place on bond and stock futures," said Pascale Auclair, global head of investment at La Francaise Asset Management.
"Nonetheless, we will remain vigilant going into the legislative elections," Auclair added.
If he wins, Macron will need to secure a working parliamentary majority for his young party in June, and then seek broad popular support for labour reforms that are sure to meet resistance.
BANKS, INDUSTRIALS DRIVE RISK-ON RALLY
Shares in French companies and banks saw the biggest gains across the region with the euro zone's bank index rising 6.8 percent to its highest level in 16 months and Paris blue chips hitting their highest since April 2015, up 4.6 percent.
The top eight gainers on the pan-European index were banks with UniCredit, Credit Agricole and Societe Generale leading the way, up 9.6 to 10.7 percent.
Brokers including Goldman Sachs, Citi and Kepler Cheuvreux all came out heavily in favour of European banks on Monday morning.
Industrials were also in demand with shares in French construction companies Saint-Gobain and Vinci soaring 7.3 percent and 6.6 percent respectively, as investors turned their focus to their earning prospects.
"There was already a case for this sector before the election, but now we are looking beyond and back to fundamentals," says Vincent Juvyns, global market strategist at JP Morgan Asset Management.
Europe's construction and materials sector index was on course for its best daily gains since last November's U.S. election, up 3.4 percent.
The rush into risky assets weighed on precious metal miners Randgold Resources and Fresnillo which fell 2.7 percent and 0.9 percent respectively, as prices of gold, seen as a safe haven asset, fell more than 1 percent.
Italy, considered to be especially vulnerable to an anti-European outcome of the French election, had the strongest rally after France.
Italy's FTSE MIB soared 4 percent to its highest since January 2016, driven by strong gains in banks.
Next up on investors' radars will be the slew of results poised to kick off European earnings season this week including heavyweight banks UBS and Credit Suisse.
European first-quarter earnings are expected to rise 7.2 percent, according to Thomson Reuters I/B/E/S data. Excluding the energy sector, this would be a rise of 2.9 percent.
Meanwhile, some results on Monday cheered investors.
Philips rose 3.6 percent after the maker of medical devices and healthcare products beat expectations, while results at Swedish telecoms firm Tele2 were also stronger than expected, sending its shares up 6.5 percent.
(Editing by Jon Boyle and Pritha Sarkar)