The London FTSE 100 index gained 0.83 percent to close at 5667.20 points, while in Paris the Cac 40 edged up 0.05 percent to 4511.37. The Frankfurt Dax added 0.17 percent to finish at 6589.46.

The Euro Stoxx 50 index of leading eurozone companies inched up 0.02 percent to 3427.33.

US stocks wilted in mid-day trading following heavy losses at the end of last week as investors girded for an interest rate policy meeting of the Federal Reserve in troubled economic times.

Most economists expect the central bank to leave its base rate pegged at 2.0 percent despite tough talk on inflation from Fed Chairperson Ben Bernanke.

The Dow Jones Industrial Average was down 0.15 percent at 11 824.69 points after opening in positive territory.

The tech-dominant Nasdaq composite shed 0.63 percent to reach 2391.02.

Traders said they were positioning themselves on Monday for a two-day meeting of the Fed which kicks off on Tuesday.

Central bank policymakers are in a tough corner with inflation pressures heating up even as the economy teeters on the brink of recession.

"Unfortunately, there may not be much more that the Fed can do to stimulate economic growth should the resilience of the economy continue to be tested by the credit crisis and oil prices," said Ed Yardeni, the chief investment strategist at Yardeni Research.

Part of the inflation worry has been stoked by rocketing crude oil prices.

Oil prices rose above 136 dollars a barrel on Monday after major energy producers ruled out further output hikes despite consumer fears that the world faces a tight supply situation, traders said.

Saudi Arabia's King Abdullah announced on Sunday that his country had increased output to 9.7-million barrels a day as he opened a summit on oil prices in Jeddah of producers and consumers.

The market had already expected the formal announcement

Underpinning trading sentiment in London Monday was the oil sector, where the higher prices boosted energy companies.

BP rose 1.82 percent to close at 574.75 pence while Cairn added 1.75 percent to reach 3201.

In the mining sector ENRC shot up 2.13 percent to 1483 pence.

Banks remained under pressure in a continuing global credit squeeze. Press reports of a possible bid by Lloyds TSB for Dresdner of Germany sent Lloyds shares tumbling 2.67 percent to 318.75 pence.

Elsewhere in the sector HBOS fell 4.25 percent to 270.25 pence.

In Paris analyst Jean-Philippe Muge of SwissLife Gestion Privee said investors in the current climate were skeptical about chances for a sustained rebound.

"The problem is that even cheaper oil and a stronger dollar are not sufficient to assure us. A barrel of oil stuck at around 130 dollars and a euro at 1.55 dollars remain very high."

As in London, banks suffered on the Paris exchange. BNP Paribas lost 0.97 percent to close at 58.74 euros while Credit Agricole gave up 4.48 percent to reach 12.78 euros.

Also dampening enthusiasm were weak economic reports from the eurozone.

Business activity in the 15 eurozone countries contracted in June for the first time for almost five years, according to a widely watched survey on Monday, raising the spectre of stagflation.

In Germany a key business climate index fell to an 18-month low point in June, with high oil prices pulling the rug from under the feet of Europe's biggest economy.

In Frankfurt Monday Lufthansa was among the day's losers, falling 2.66 percent to 14.26 euros on concern over crude prices.

Moving in the opposite direction was the industrial conglomerate Man, which rose 0.62 percent to 79 euros on press reports that it was preparing to sell off its Man Ferrostaal services division.

Elsewhere in Europe there were declines of 0.54 percent on the Bel-20 in Brussels, 0.07 percent to 12 403.4 on the Ibex-35 in Madrid, 0.43 percent to 29 727 on the SP/Mib in Milan and 0.60 percent to 7026.92 on the Swiss Market Index.

The AEX in Amsterdam rose 0.03 percent.

AFP