Sterling recovered to above $1.59 after the Vodafone deal earlier sent it down to a five-months low against the dollar at $1.5885. The US share market opened firmer despite stronger-than-expected US January employment data which also had little impact on the dollar.

The widely expected agreement between Mannesmann and Vodafone, which was approved by Mannesmann's supervisory board initially cheered share markets, which then turned mixed as investors moved in different directions to capitalise on the deal.

In Britain, the leading FTSE 100 index dropped 1.5 percent, reversing an early rise as investors sold FTSE futures to buy Mannesmann stock as the cheapest way into what will be the world's largest telecoms group when Vodafone takes over the German company.

"The funds are going to be overweight the FTSE and underweight Vodafone. And they're bailing out of the index futures and into Mannesmann," said one leading futures trader.

Mannesmann's management gave in on Thursday after marathon talks with Vodafone and unanimously recommended a fresh, all-share offer of 58.96 Vodafone shares per Mannesmann share. This would give Mannesmann investors 49.5 percent of the combined group rather than the previous 47.2 percent offered. Mannesmann shares were off 0.40 euros at 325 euros.

The Vodafone/Mannesmann deal reinforced the supremacy of the technology and telecoms sectors across Europe, with the Dow Jones Stoxx Technology index up 3.6 percent and the Telecoms index up 2.7 percent. The construction sector was also firmer while energy and defensives like food and beverages and pharmaceuticals were lower.

The pan-European Eurotop index of 300 shares edged up 0.2 percent at 1553.63 while the narrower Euro Stoxx index of 50 blue chip euro zone shares was up 1.6 percent at 5125.47. Germany's benchmark Dax index reversed to fresh record highs as the index's largest issue Deutsche Telekom extended gains on rival Mannesmann's imminent departure from the index. The Dax was up one percent at 7428.22, a shade from record high of 7430.84.

Telecoms stocks surged in France as speculation about future alliances fired up interest in France Telecom, up 6.2 percent, and Bouygues, up eight percent. Vivendi erased gains and was flat at 120 euros. Vodafone and the French media and utility group have a conditional agreement to create a pan-European Web portal if Vodafone succeeds in taking over Mannesmann.

Paris's CAC-40 index surpassed test at 6,300 extending its record high with further encouragement from a firm U.S. share start.

On the downside, Spain's high-flying Internet stock Terra Networks eased on news that its Chief Executive Officer Juan Perera was leaving the company.

Little impact from us employment data
Stronger-than-expected US employment data which saw January non-farm payrolls rise 387,000 against 316,000 in December did little to affect the U.S. share market. The Dow was up 0.7 percent and the technology-rich Nasdaq was up 1.2 percent.

"We're looking at a market that has been driven by a lot of technical forces and it seems to me that these numbers are very,very strong but a lot had been factored into the marketplace and the key comes from what happens to inflation and I don't get a key indication of inflation from these numbers," said Richard Berner, Morgan Stanley's chief economist.

The dollar's recovery against the euro, helped by weak German industry orders, was also intact while it eased slightly against the yen after testing highs above 108 yen. A Reuters poll of economists forecast on average a decline in non-farm payrolls to 255,000 in January.

Unemployment was at the expected four percent against 4.1 percent and average hourly earnings rose 0.4 percent versus a previous 0.4 percent.

The euro was orbiting $0.98 after a low of $0.9788 and the U.S. currency was around 107.7. Euro zone government bond yields moved higher in a delayed reaction to the strong U.S. data. The 10-year cash Bund rose 6.7 basis points to 5.46 percent.