By Blaise Robinson

PARIS, Dec 12 (Reuters) - European stocks ended higher on Wednesday, paring early losses after the U.S. Federal Reserve said it will team up with other European central banks to ease tight conditions in credit markets.

Energy stocks were among the biggest gainers, boosted by a 2 percent rise in crude prices. Total <TOTF.PA> gained 0.9 percent and Royal Dutch Shell <RDSa.L> rose 1.4 percent.

The Fed said it will set up a temporary short-term lending facility, while the Bank of England, the European Central Bank, the Bank of Canada and the Swiss National Bank also announced measures to alleviate credit market strains.

The FTSEurofirst 300 <.FTEU3> index of top European shares closed 0.4 percent higher at 1,546.42 points, after losing 1 percent earlier in the session.

Stocks spent most of the day in the red, as a quarter percentage point interest rate cut by the Fed on Tuesday was seen as too small to revive bank lending and shore up the economy.

"Part of yesterday's disappointment came from the fact there was a concern that the Fed wasn't doing enough. But today's announcement is the sign that the Fed is doing something specifically to address the market's biggest worry: the credit squeeze," said Kate Warne, strategist at Edward Jones in St. Louis.

"To a certain extent, this move by the Fed matters more than a rate cut, because anything that can help bring the credit market to normal levels and getting banks to be more comfortable to lend to each other will help ease the credit crunch and have a much bigger impact on the economy," she said.

"It's something more targeted at the problem and therefore has a better chance to ease the stress and reduce the probability that we see a global recession."

The crisis in the credit market, sparked by a debacle in the U.S. subprime mortgage market, has hit equities over the past few months as major banks including Citigroup <C.N> and UBS <UBSN.VX> unveiled huge writedowns.

The FTSEurofirst 300 is up 4.2 percent on the year, on track to record its worst yearly performance since 2002.

Banking shares have been hammered, with the DJ Stoxx European bank index <.SX7P> down 13 percent so far this year, as investors fear that financial institutions have not yet unveiled the full impact of the crisis in their books.

Although the broad market rallied on the announcement of the joint action by the central banks on Wednesday, the news failed to boost banking stocks, with Royal Bank of Scotland <RBS.L> ending down 2.3 percent, UBS <UBSN.VX> down 1.2 percent, and Societe Generale <SOGN.PA> down 1.1 percent.

The Fed said the temporary facility would allow it to inject short-term funds into strained markets through a broader range of counterparties and against a broader range of collateral than through its usual open-market operations.

"The co-ordinated central bank action to alleviate the credit crunch is a step in the right direction but it is no panacea to solving the crisis," Bear Stearns analysts wrote in a note.

"While it is a potentially constructive step it does not get away from the fact that the central banks still need to cut rates. It is complementary medicine to improve the situation. The Fed will still be under pressure to cut rates again in January as will the Bank of England."

Germany's DAX index <.GDAXI> ended up 0.8 percent, UK's FTSE 100 index <.FTSE> up 0.4 percent and France's CAC 40 <.FCHI> up 0.3 percent.

Bayer <BAYG.DE> gained 2.7 percent after JPMorgan raised its price target on the stock following strong trial data for Bayer's experimental drug rivaroxaban.

Wm Morrison Supermarkets <MRW.L> rose 1.8 percent after research group TNS said the grocery firm had increased its market share.

Troubled UK lender Northern Rock <NRK.L> fell 5 percent as concerns mounted over a potential sale, with only two suitors left in the running. U.S. buyout firm Cerberus, a potential third suitor, has been interested in Northern Rock, but has not been considered a front-runner for some time. Sources familiar with the situation said Cerberus is not in active talks with the bank. (Editing by Paul Bolding)

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Keywords: MARKETS EUROPE STOCKS/CLOSE

 
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    For rolling updates on what is moving European shares  
    please click on [STXNEWS/EU] 
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 For pan-Europeanmarket data and news, click on codes in  
 brackets: 
 European Equities speed guide...................<EUR/EQUITY> 
 FTSEurofirst 300 index..............................<.FTEU3> 
 DJ STOXX index......................................<.STOXX> 
 Top 10 STOXX sectors...........................<.PGL.STOXXS> 
 Top 10 EUROSTOXX sectors......................<.PGL.STOXXES> 
 Top 10 Eurofirst 300 sectors...................<.PGL.FTEU3S> 
 Top 25 European pct gainers.......................<.PG.PEUR> 
 Top 25 European pct losers........................<.PL.PEUR> 
    Main stock markets: 
 Dow Jones...............<.DJI>  Wall Street report .....[.N] 
 Nikkei 225.............<.N225>  Tokyo report............[.T] 
 FTSE 100...............<.FTSE>  London report...........[.L] 
 Xetra DAX.............<.GDAXI>  Frankfurt market stories[.F] 
 CAC-40.................<.FCHI>  Paris market stories...[.PA] 
 World Indices......................................<0#.INDEX> 
 Reuters survey of world bourse outlook..........<EQUITYPOLL1> 
 Western European IPO diary...........................[WEU/IPO] 
 European Asset Allocation.........................[EUR/ASSET] 
    Reuters News at a Glance: Equities...............[TOP/EQE] 
    Main currency report:...............................[FRX/] 
  Keywords: MARKETS EUROPE STOCKS/ =2