By Atul Prakash

LONDON (Reuters) - European stocks closed sharply higher on Thursday as investors returned to the market after crude prices slipped and data showed the U.S. economy expanded at a much stronger rate than reported earlier.

The banking sector was the biggest weighted sectoral gainer on the pan-European FTSEurofirst 300 index that ended 1.5 percent higher at 1,190.91 points. But the benchmark is still down 21 percent this year.

Sentiment improved after the U.S. data lifted optimism about a recovery in the economy, which has been under pressure following troubles in the U.S. housing market.

Figures showed the U.S. economy expanded at a 3.3 percent annual rate in the second quarter, as consumer spending and net exports were more robust than initially estimated and inventories fell less sharply.

Also, the number of U.S. workers filing new claims for jobless benefits fell by 10,000 last week, but remained at elevated levels indicating a weak labour market.

"People got really surprised by the second-quarter GDP revision and jobless claims, which also dropped surprisingly," said Franz Wenzel, strategist at AXA Investment Managers.

"But we are not out of the woods. For that we would definitely need something like a big relief on the inflation front," Paris-based Wenzel said.

French bank Credit Agricole (CAGR.PA: Quote, Profile, Research) was one of the top gainers on the FTSEurofirst 300, jumping 8.9 percent despite posting a 94 percent fall in quarterly profit.