* FTSEurofirst up 2.6 pct, Euro STOXX 50 rises 4.96 pct
* FTSEurofirst and Euro STOXX at highest close since early May
* Traders say rally could peter out
* Lack of clarity over aspects of latest EU aid measures -traders
By Sudip Kar-Gupta
LONDON, June 29 (Reuters) - European shares closed at a seven-week high on Friday, after fresh measures taken by European leaders to tackle the region's debilitating debt crisis boosted benchmark equity indexes and battered bank stocks such as UniCredit.
However, many remained sceptical over whether the rally would last, due to uncertainty over how some of the proposals agreed at a European Union summit on Friday - such as aiding troubled banks and intervening on the bond markets - would work in practice.
The FTSEurofirst 300 index closed up 2.6 percent at 1,021.39 points - its highest closing level since ending at 1,022.52 points on May 11.
The Euro STOXX 50 index advanced by around 5 percent to 2,264.72 points - it's best closing level since ending at 2,283.09 points on May 7.
"I am selling into this. There's still a lot of hurdles. I'd rather be on the safe side," said ClairInvest fund manager Ion-Marc Valahu, adding he had sold some of his positions on Italy's FTSE MIB, France's CAC and Germany's DAX equity indexes.
Others were more positive over the EU summit, which saw European leaders agree a series of short-term steps to shore up their monetary union and bring down the borrowing costs of Spain and Italy, seen as too big to bail out.
The Spanish and Italian stock markets - which have fallen sharply this year on worries over Spain's debt-ridden banks and the risk that Italy might be the next victim in the debt crisis that has already hit Spain and Greece - rallied back.
Spain's benchmark IBEX index rose 5.7 percent, while Milan's FTSE MIB rose 6.6 percent, marking its best gain since May 10, 2010.
"We bought Italian equities and Italian government bonds this morning," said Michel Juvet, chief investment officer at Swiss bank Bordier.
"We still have many problems, but at least they've taken a step in the right direction," he added.
ECB RATE CUT MAY SUPPORT RALLY NEXT WEEK
The EU summit also resulted in a pledge to create a single banking supervisor for euro zone banks based around the European Central Bank (ECB), in a landmark first step towards a European banking union that could help shore up struggling member Spain.
In a key concession by German Chancellor Angela Merkel, the leaders agreed to waive the euro zone ESM rescue fund's preferred creditor status on lending for Spanish banks, removing a deterrent to investors buying Spanish government bonds, who feared taking the first losses in any debt restructuring.
Banks were among the best-performing European stocks, with Italy's UniCredit surging 14.3 percent while rival Intesa rose 11.6 percent. Spain's BBVA rose 9 percent, with Santander up 6.9 percent.
However, Integrated Asset Management Chief Executive Emanuel Arbib said he had not been tempted to buy any of these stocks or other equities on the back of Friday's rally. Despite Friday's gain, the euro zone STOXX bank index remains down by around 10 percent since the start of 2012.
Arbib pointed to an ongoing lack of clarity on how the euro zone's temporary EFSF and permanent ESM rescue funds might work in practice.
"The markets are up on relief about Merkel finally beginning to cede some territory, rather than the actual measures which are still limited by the lack of full ECB funding for the ESM," said Arbib, whose firm remains overweight on bonds
Traders added that expectations that the European Central Bank may cut interest rates on July 5 could ensure that the stock market rally could continue for a few days.
However, JN Financial senior trader Adrian Redmond said the European stock market rally was still vulnerable to a sell-off.
"If we don't get much firmer news, then we may drift off again," he said.