By Patrizia Kokot

LONDON (Reuters) - European shares ended a volatile session with gains on Friday as a sharp drop in crude oil more than offset initial disappointment over earnings from U.S. home lender Fannie Mae (FNM.N: Quote, Profile, Research).

The FTSEurofirst 300 index of top European shares closed 0.8 percent higher at 1,199.02 points, having swung between 1,179.92 and 1,200.56 points during the session. The index gained 3 percent this week but is still down more than 20 percent this year.

The euro fell to five-month lows against the dollar after the European Central Bank's indicated on Thursday it was in no hurry to raise euro zone rates after having upped rates in July, citing inflation concerns.

"By raising interest rates to 4.25 percent, the central banks have dealt a heavy blow to industry and the market is playing this now," said strategist Andreas Huerkamp at Commerzbank in Frankfurt.

Automotive and defence stocks as well as luxury goods makers were among the beneficiaries of the stronger dollar on Friday.

Among car makers, Daimler (DAIGn.DE: Quote, Profile, Research) added 3.9 percent, BMW (BMWG.DE: Quote, Profile, Research) was up 6.5 percent and Peugeot (PEUP.PA: Quote, Profile, Research) and Renault (RENA.PA: Quote, Profile, Research) added 4.3 and 4.6 percent respectively. The DJ Stoxx European car sector index jumped 3.4 percent.

Crude oil hit a low of $115.61 a barrel.

Pharmaceuticals added most points to the index, with Sanofi-Aventis (SASY.PA: Quote, Profile, Research) rallying 4 percent on the back of news that its experimental heart drug Multaq is to get a priority review from the U.S. Food and Drug Administration. The drug could be worth more than $2 billion in sales annually, according to analysts. Peers Novartis (NOVN.VX: Quote, Profile, Research) and Roche (ROG.VX: Quote, Profile, Research) gained 1.3 and 1.7 percent respectively.