The wave of merger and acquisition activity that spread across Europe on Monday helped blue-chip stocks in the region put in their best one-day performance for two years.

The FTSE Eurofirst 300 index rose 25.81 points, or 2.2 per cent, to 1,199.75. Despite the advance, the benchmark fell 2.4 per cent over the month.

Telecoms put in one of the day’s best sectoral performances after Spain’s Telefónicaagreed to buy UK mobile operator O2 for £17.7bn in cash – the second biggest cash deal globally in 10 years.

The deal ended months of speculation about a possible bid for O2 – including confirmation from Deutsche Telekom and Dutch operator KPN that they had held negotiations about a possible joint bid.

At 200p per O2 share, it represented a 22 per cent premium to Friday’s closing price and sent O2 shares up more than 25 per cent.

Shares in Telefónica, however, dropped 2.3 per cent to €13.31 when they resumed trading after suspension by the Spanish stock market regulator.

“This deal may surprise those Telefonica shareholders who were already nervous on Telefónica’s M&A strategy following Cesky Telecom,” Credit Suisse First Boston said in a research note.

Telefónica acquired 51 per cent of Czech operator Cesky for €2.7bn in September.

Deutsche Telekom, which lost out to Telefónica in its acquisition of Cesky, reversed an initial decline to end 0.1 per cent firmer at €14.73. The stock’s early fall came as the market sceptically viewed its prospects for expansion in the UK, where its T-Mobile arm is already struggling. Analysts judged it unlikely to return with a higher bid for O2.

But KPN gained 6 per cent to €7.94, with CSFB commenting: “If Telefónica is basically building a European footprint, KPN may remain a possible target.”

Telecom Italia also climbed 2.6 per cent to €2.413 after Morgan Stanley upgraded its recommendation on the stock from “underweight” to “neutral”.

Telenor, the Norwegian operator, shot up 7.6 per cent to NKr63.50 after announcing it would buy Vodafone’s Swedish unit, increasing its Scandinavian customer base by 37 per cent.

Telenor was also helped by comments by Norwegian parliamentarian Ingvild Vaggen Malvik, who said the Socialist Left party still hoped to buy back shares in partly privatised companies such as Telenor and Statoil.

Elsewhere, French telecoms and construction group Bouygues rose 5.7 per cent to €41.17. CSFB said it saw Bouygues as another potential mobile bid target.

Meanwhile, Switzerland’s Novartis raised its cash bid for the 52 per cent of US vaccines maker Chiron it does not already own to $45 a share, $5 a share more than its original offer.

The move will increase Novartis’ exposure to the development of vaccines against diseases such as avian flu. Novartis shares rose 2.2 per cent to SFr69.35.

Elsewhere in the sector, Altana rose 3.8 per cent to €47.15 following reports that the German chemicals and drugs group had decided to sell its pharmaceuticals unit.

Analysts suggested that Altana could find it difficult to find a buyer but said that a sale would be positive for the company’s stock.

Banking stocks had a strong session as investors took heart from encouraging third quarter figures from ABN Amro.

Net profits came in €1.2bn, beating expectations and prompting the Netherlands’ biggest bank to raise its outlook for the second half.

Deutsche Bank upgraded ABN shares from “hold” to “buy” and raised its price target from €20.9 to €22.3, Analyst Matt Spick highlighted strong results from ABN’s wholesale and Brazilian retail banking divisions.

ABN shares rose 3.2 per cent to €19.73. Elsewhere in the sector, UBS, which reports today, rose 3.5 per cent to SFr109.50, while Commerzbank, due to unveil its figures on Thursday, climbed 4.1 per cent to €21.84.

Deutsche Bank, which announced strong results last Friday, rose 2.8 per cent to €78.13 after Goldman Sachs, JPMorgan and CSFB raised their earnings per share forecasts for the bank.