UPDATE 1-Indian shares rally on EU summit

* Shares jump tracking Asian peers on EU deal

* Morgan Stanley upgrades India to equalweight

* Hopes from PMO to jumpstart reforms (Adds analyst's view on market, updates prices)

By Manoj Dharra and Abhishek Vishnoi

June 29 (Reuters) - Indian shares rose 2.6 percent on Friday fuelled by a global rally in risk assets after European leaders agreed on decisive action to lower the borrowing costs of Italy and Spain and create a single supervisory body for euro banks.

After all-night talks, the leaders of the 17-nation currency bloc agreed that the euro-area rescue funds could be used for sovereign debt purchases without forcing countries to adopt extra austerity measures.

Local stocks received a further boost on Morgan Stanley upgrading Indian equities and a strong rebound in the rupee aided sentiment.

The upgrade came at a time when India's Prime Minister Manmohan Singh took charge of finance ministry on Tuesday and said will take steps to revive economic growth.

On Thursday, India published draft guidelines to implement rules that target tax evasion but have provoked an outcry among foreign investors at a time when the country needs capital inflows.

"Positive global cues emerging from EU and positive news flow pertaining to what progressive measures PMO can take, now that finance ministry has come under its ambit, took the markets higher," Sandeep Shah, CEO, Sampriti Capital said.

"Nifty should head 5,400-5,600 in coming months," he said.

India's benchmark index gained 2.59 percent at 17429.98, highest level since May 2.

The BSE index surged 9.2 percent in June, its biggest monthly gains since Jan.

The 50 share NSE index also added 2.52 percent to be at 5,278.90 points adding 9.6 percent this month.

Banks, infrastructure shares were leading the gains while some auto shares gained after announcement of reduction in petrol prices by 2.46 rupees per litre.

ICICI Bank rose 5 percent, State Bank of India rose 2.9 percent while HDFC Bank added 2.7 percent.

Bharat Heavy Electrical rose 5.16 percent while Larsen & Toubro added 4.1 percent, the company also secures orders valued over 20.40 billion rupees.

Bajaj Auto advanced 1.5 percent while Hero Motocorp ended 3 percent higher.

Maruti Suzuki India rose 4.4 percent after Jefferies upgraded it to "buy" from "hold" and raised target price to 1,446 rupees from 1,398 rupees.

Broad-based buying helped gains in other blue chip shares: Reliance Industries ended 2.5 percent higher and cigarette major ITC added 3 percent.

FACTORS TO WATCH * Euro stages relief rally on EU agreement * Brent back up to $93, but deep quarter loss * EU deal cuts Spain, Italy debt yields * Foreign institutional investor flows * For closing rates of Indian ADRs

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