San Francisco Frontiers - European stocks rally on inflation drop

Consumer prices rose 5.5 percent this month, down from from 6.1 percent in May, according to the European Union's Eurostat agency.

The drop was slightly better than analysts' consensus forecast for a drop to 5.6 percent.

European Central Bank president Christine Lagarde said this week that another interest rate increase was likely in July in efforts to combat inflation.

But some analysts say the June inflation data raises hopes of a pause in the rate-hike campaign.

"European stocks are ending the week on a high, buoyed by another encouraging inflation report that will soon support the end of the ECB's tightening cycle," noted Craig Erlam, senior market analyst at OANDA trading group.

In the United Sates, the Federal Reserve is set to keep lifting US borrowing costs following strong data this week surrounding the world's biggest economy.

- China worries -

Traders in Hong Kong and Shanghai trod with caution Friday after fresh data on China's economy showed further slowing, with factory activity contracting for the third straight month while growth in the services and construction industries slowed.

A string of similar data in recent months has fanned speculation that authorities will unveil measures to kickstart the economy.

But aside from some small interest rate cuts, officials have unveiled very little of substance to reassure investors, which has kept equities subdued.

Meanwhile, commentators have warned that a big-buck spending spree such as those seen in the past was unlikely, fuelling worries of an extended period of weak growth.

China's cabinet on Friday said it would "take effective measures to enhance the momentum of development, optimise the economic structure, and promote the sustained recovery of the economy... in a timely manner".

But Robert Carnell, of ING, said: "The market continues to fixate on the possibility of stimulus measures, and in due course, we do expect the government to step in and provide some support.

"However, we remain unconvinced that this will resemble anything like the financial bazooka that some want to see."

Traders were keeping an eye on Japan after the yen at one point softened to more than 145 per dollar -- its weakest since November -- stoking expectations authorities will step in to support the currency.

It also tumbled to a fresh 15-year low against the euro.

The yen has been battered against its major peers this year owing to the Bank of Japan's refusal to hike rates, even as inflation edges higher and most other central banks press on with their tightening campaigns.

- Key figures around 1115 GMT -

London - FTSE 100: UP 0.7 percent at 7,526.15 points

Frankfurt - DAX: UP 1.2 percent at 16,132.27

Paris - CAC 40: UP 1.2 percent at 7,397.47

EURO STOXX 50: UP 1.0 percent at 4,396.19

Tokyo - Nikkei 225: DOWN 0.1 percent at 33,189.04 (close)

Hong Kong - Hang Seng Index: DOWN 0.1 percent at 18,916.43 (close)

Shanghai - Composite: UP 0.6 percent at 3,202.06 (close)

New York - Dow: UP 0.8 percent at 34,122.42 (close)

Euro/dollar: DOWN at $1.0851 from $1.0872 on Thursday

Pound/dollar: UP at $1.2648 from $1.2613

Euro/pound: DOWN at 85.77 pence from 86.17 pence

Dollar/yen: DOWN at 144.66 yen from 144.82 yen

West Texas Intermediate: DOWN 0.1 percent at $69.80 per barrel

Brent North Sea crude: FLAT at $74.34 per barrel

burs/bcp/lth

M.Gonzalez--SFF