[MILAN] Spanish stocks rebounded on Thursday from heavy losses in the previous session driven by escalating tensions over Catalonia, leading gains across European indexes.

Spain's IBEX ended the session up 2.5 per cent, led by its banking stocks, as worries over Catalonia eased.

Shares in Banco Sabadell rose 6.2 per cent on news the bank's board would meet to discuss moving their headquarters out of Catalonia's capital city, Barcelona.

Sabadell led gains on the main share index, closely followed by Caixabank, also headquartered in Barcelona.

Analysts said Spanish banks in particular had benefited from the country's improving economic growth.

"Throughout this year, the Spanish economy has been continuing to do extremely well, and the banks have been big beneficiaries of that," said Jefferies banks analyst Benjie Creelan-Sandford.

"Clearly, share prices have come under pressure, but Caixabank and Sabadell are still up around 20 per cent year-to-date."

The pan-European Stoxx 600 index index closed 0.2 per cent lower, while Germany's DAX was flat, off the record high it reached on Wednesday.

A quarterly Reuters poll published showed that Spanish stocks were expected to end 2017 up nearly 14 per cent, a drop from the 20 per cent rise seen in the previous poll.

The poll predicted the DAX would rise 13 per cent this year and 5 per cent in 2018. France's CAC is seen up 11 per cent in 2017 and 7 per cent in 2018. Italy's FTSE MIB is the front-runner to end 2017 as the best-performing country index.

The biggest declines on the STOXX came from shares in Assa Abloy, down 5 per cent, after it said Chief Executive Johan Molin may step down next year after more than a decade running the Swedish lockmaker.

Osram Licht declined 4.7 per cent after Siemens sold its remaining 17 per cent stake for 1.2 billion euros.

Several banking stocks dragged, with Barclays falling after a downgrade by Exane.

Banks were hit this week by worries over Spain and news that the ECB will ask banks to set aside more cash to cover newly classified bad loans.

Mid-tier Italian lender Creval fell 10.6 per cent, with traders citing a downgrade by an Italian broker who said the bank may need a cash call to fund further loan-loss provisions following the ECB decision.

Utilities were led higher by French power company EDF, which gained 3.3 per cent after an upgrade to "buy"at Jefferies.

REUTERS