European shares closed at their highest level in 5-1/2 years on Friday, buoyed by a flurry of takeover activity and supported by oil stocks as crude crept back towards $63 a barrel, according to Reuters. BAE Systems rallied after British prosecutors dropped an investigation into past defence deals with Saudi Arabia, while Portugal's Millenium bcp jumped as investors bet it could be vulnerable to a takeover. "The markets are in relatively good shape. We're seeing a little bit of a year-end rally," said Thomas Muehlberger, fund manager at Bayern Invest in Munich. "Everyone is turning around his portfolio and a lot of people were thinking it would be better to have a little bit more exposure to equities. There's a lot of money looking for returns." The FTSEurofirst 300 index of top European shares climbed for a 10th consecutive session, ending up 0.6 percent at 1,489.1 points, its highest close since May 2001. The index rose 2.7 percent for the week and notched up its biggest weekly points gain in almost five months. The European index is up almost 17 percent since the start of the year after a burst of takeover activity and a recent string of economic data showing a resilient U.S. economy helped European equity markets rebound from a seven-week low on Dec. 1. "Equities have outperformed fixed-income securities, and within equities Europe has outperformed other regions," said Goldman Sachs strategists in a report. "We forecast 11 percent total returns for European equities in 2007." MAKING HEADWAY Equities held their ground after data showed U.S. consumer prices held steady in November, confounding expectations of a small rise, and raising expectations the Federal Reserve may soon be able start cutting interest rates. Oil stocks gained as crude oil headed back towards $63 a barrel after OPEC agreed to cut supply for the second time in two months. BP rose 0.5 percent, Royal Dutch Shell added 0.6 percent and BG rose 1.5 percent. Construction stocks were also stronger, with Bouygues up 2.6 percent and Eiffage 2.5 percent higher. BAE shares added 6.9 percent as British prosecutors dropped a two-year corruption inquiry into deals with Saudi Arabia. BAE had recently said the probe put at risk a BAE-led sale of Eurofighter Typhoon jets to the oil-rich kingdom. TAKING OVER Tobacco stocks were in the spotlight after Japan Tobacco Inc. agreed to buy British cigarette maker Gallaher Group Plc for 7.5 billion pounds ($14.7 billion) in cash, the biggest-ever foreign acquisition by a Japanese firm. Gallaher shares were 0.3 percent lower, while Imperial Tobacco gained 0.5 percent and British American Tobacco added 0.7 percent. Takeover speculation also lifted shares in Portugal's largest listed bank, Millenium bcp, by over 5 percent, as traders bet the sale of a stake in the bank by Banco BPI could make it vulnerable to a takeover. In other takeover stories, KKR and Permira agreed to buy a controlling stake in German broadcaster Prosiebensat.1, whose shares rose 0.5 percent. Shares of France Telecom gained 1.7 percent after the operator reiterated its 2006 financial targets and said it expected cash flow to remain at the same level as 2006 next year on a like-for-like basis.