By Sruthi Shankar

European shares headed towards a one-month high on Monday, with a rally in China's markets setting an upbeat tone as investors banked on the world's second biggest economy to lead a recovery from the coronavirus-induced slump.

The pan-European STOXX 600 climbed 1.6%, as stocks exposed to China, including carmakers, industrials, energy firms and luxury goods makers, gained strongly.

The German DAX, London's FTSE 100 and France's CAC 40 all rose about 2%.

China's blue-chip index <.CSI300> jumped over 5%, as investors stocked up on cheap funding to invest in an economy that analysts predict will recover faster and better than other major countries battling new waves of infections. [.SS]

"They (China) were the first to get hit by the virus, and that's the sort of timeline that other economies in the world can expect for a bounce back," said Michael Baker, an analyst at ETX Capital in London.

"The only concern is the United States. That's a spanner in the works."

In the first four days of July alone, 15 states have reported record increases in new cases of COVID-19, which has infected nearly 3 million Americans and killed about 130,000, according to a Reuters tally.

Optimism from Asia spilled over to European trading session, with HSBC, Banco Santander, BNP Paribas offering the biggest boost to the STOXX 600.

Europe's battered banking index <.SX7P> jumped 4%, touching its highest level since June 10.

UK homebuilders Persimmon, Taylor Wimpey and Barratt Developments were the top gainers, surging about 6% after reports that British Finance Minister Rishi Sunak planned to raise a property tax threshold, among other steps to reduce the economic toll of the health crisis. [.L]

Barratt said it was starting the new financial year with "cautious optimism" as its forward order book improved.

Sonova, the world's biggest hearing aid maker, rose 5.0% after saying it would close some stores and cut jobs as it expects first-half results to only partially recover from the pandemic hit.

Nordic banking group Nordea rose 3.0% after it agreed to buy the occupational and individual pension portfolios from Frende Livsforsikring AS.

Swiss speciality chemicals group Clariant slumped 13.6% to the bottom of STOXX 600 on trading ex-dividend.

(Reporting by Sruthi Shankar in Bengaluru; editing by Patrick Graham and Sriraj Kalluvila)