LONDON, Sept 13 (Reuters) - Rebounding insurers propped up European stock markets on Thursday but investors remained on edge awaiting Wall Street's reopening and bracing for U.S. retaliation for Tuesday's terror attacks.

Swiss Re's 10.6 percent surge led a near four percent rise for the insurance sector. Fund managers said they were picking up bargains following steep falls amid fears that insurance companies will face claims running into billions after the New York and Washington attacks.

"For long-term orientated investors and people that work on the basis of rationality, there is certainly stock out there that deserves to be picked up at current levels," said Cristoph Bruns, head of equities at Union Investment, Germany's third-largest fund.

"Insurance is over-reacting. In the end what is happening is good for the insurance industry because it reminds people they need to get insured and the market value losses are far exceeding the payouts that will be necessary".

By the time most European bourses closed, the pan-European FTSE Eurotop 300 index and the narrower blue-chip DJ Euro Stoxx 50 added nearly 0.9 percent each.

Among other insurance sector blue chips, Aegon jumped seven percent, while Munich Re and Zurich Financial added five percent each. Damage estimates run as high as $15 billion from Tuesday's attacks in which hijacked planes levelled the World Trade Center and damaged the Pentagon, likely killing thousands, but some analysts said European insurers' liabilities may be lower than initially thought.

The European Central Bank left interest rates on hold as expected, but many analysts expect the Federal Reserve to cut rates when U.S. markets resume - which may come as early as Friday - to support badly shaken global financial markets.

"Should the Fed cut before the scheduled meeting on October 2, which now seems likely, the next ECB move could well come even sooner, either in the immediate aftermath of the Fed change as part of a coordinated series of rate moves or at the council meeting on September 27," BNP Paribas said in a note to clients.

But loosening monetary policy may not be enough to turn markets around, strategists said.

"Rate cuts will not make up for the fact that the global economy was weakening into Tuesday's disaster and will not make up for the fact that U.S. economic data in September will appear very weak indeed," said Bear Stearns economics and market strategist Steve Barrow.

"This time around the crisis has hit the U.S., and indeed the world, at a very vulnerable time indeed," said Barrow.

While global markets have been relatively calm it was difficult to know if this was because of thin trading volumes, or an underlying sense that the ramifications of Tuesday's tragedy could be managed by the world's central banks, he said.

"So, until all markets and exchanges are up and running again as normal it is going to be hard to tell just what view the market is taking right now."

Airlines and insurers - both heavily sold immediately after the attacks - recovered a little, but other sectors such as luxury goods began to feel the effects.

LVMH lowered its full-year operating profit target because of the U.S. attacks, sending its shares down 5.3 percent, and some analysts predicted others luxury goods makers might reduce forecasts as well.

The world's number two cruise operator, Royal Caribbean slumped 21.5 percent to a record low on the Oslo bourse on worries of post-attack cancellations.

But defensive safe havens such as pharmaceuticals continued to climb as talk continued to circulate that the attacks would push already weakened global economies into recession.

The DJ healthcare sector added 1.2 percent as heavyweights Glaxo and AstraZeneca built on this week's gains.

Other active stocks included French broadcaster TF1 , which slumped 18.4 percent after forecasting an eight to 10 percent drop in net earnings for the full year 2001.

Investors' nerves were being steadied by central banks around the world injecting cash into the financial system, but uncertainty over how the U.S. government will respond to the terror attacks hung over the market, analysts said. The NATO military alliance pledged collective assistance to the U.S. if it responds militarily

to Tuesday's destruction.

"The ultimate investment outcome will be dependent on the monetary policy response and the degree and geography of political reprisal, through its impact on oil prices," Merrill Lynch European equity strategist Michael Hartnett said.

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