By Pratima Desai LONDON, Oct 21 (Reuters) - Copper rallied on Friday as hopes of a solution to the euro zone debt crisis and signs of stronger Chinese demand emerged, but the financial storm engulfing Europe and the resulting damage to demand meant caution prevailed. The positive mood was reinforced by German government sources, who said decisions on bank recapitalisations would be made at a meeting of European Union f inance m inisters on Saturday. Other industrial metals also gained. Aluminium on the London Metal Exchange gained 3 percent to hit a session high of $2,149 a tonne, zinc rose nearly 5 percent to $1,820 a tonne, lead was up more than 5 percent to $1,884.75, tin rose more than 4 percent to $22,100 and nickel nearly 5 percent to $18,900 a tonne. Benchmark copper on the London Metal Exchange surged nearly 6 percent to $7,126.50 a tonne after tumbling nearly 7 percent on Thursday, its largest one-day fall since Sept. 22. The metal used in power and construction traded at $7,090 a tonne in official rings from $6,735 on Thursday when copper hit a two-week low of $6,710. Commodity and financial markets are watching a long-running saga as European governments seek to reach a euro zone debt deal. Eyes are on a Sunday summit at which leaders will discuss in detail a comprehensive solution. "There seems to be new hope that there will be a solution. The market is almost entirely event-driven at the moment, driven by politicians," said Daniel Briesemann, analyst at Commerzbank. A communique from French President Nicolas Sarkozy and German Chancellor Angela Merkel, following the European close on Thursday, said the wide-ranging plan would now be announced no later than next Wednesday. Volumes for the benchmark copper contract at 31,239 lots or 780,975 tonnes on Thursday were the highest since late September. Traders said many short copper positions -- bets on lower prices -- taken on Thursday were being squared ahead of the weekend meeting and explained in part why copper was showing gains. "Anybody who is long is either crazy or has information that I don't have," a metals trader said. "I'm waiting for the results of the pillow fight between France and Germany." Many funds holding copper on the expectation of supply constraints and deficits in the future are also paring or squaring their positions. A realisation that copper is still some 40 percent above the production costs of the highest-cost producers is behind these sales, and many funds who have been long since the middle of last year are losing money. "They are selling into the rally, trying to limit losses," another metals source said. "There's a long way to go before anybody even starts talking about idling capacity." Copper touched $6,635 earlier this month, its lowest since July last year. SPLIT ON CHINA A plus for the diehard bulls was the volume of copper stocks in LME-approved warehouses. <0#LME-STOCKS> <0#MCUSTX-LOC-GRD>. At 447,800 tonnes they are down nearly 6 percent since early October. Traders say much of this metal has gone to China and that there are more deliveries in the pipeline to the world's largest consumer of industrial metals. "Chinese consumers are showing a lot of interest," the metals trader said. "There's a lot more to come." That interest can be seen in the high level of cancelled warrants -- material tagged for delivery -- in LME-approved warehouses located in South Korea. About 20,000 tonnes of metal is earmarked to leave warehouses in Busan and Gwangyang. China accounts for about 40 percent of global copper demand, estimated this year at about 20 million tonnes. Weak manufacturing and below-consensus Chinese growth data in recent weeks have weighed on prices of industrial metals. Opinion is divided about copper demand growth in coming weeks and months, with some expecting China to escape relatively unscathed from global financial turbulence. Negative sentiment is based on the premise that much of the metal consumed in China is actually exported in the form of copper products to the United States and Europe. "Far from being 'ruled out' by the numbers as the most credulous of mainstream macromancers have been claiming, China's hard landing may actually be unfolding," Diapason Commodities' Sean Corrigan said in a note. China's concern about the fallout from the euro zone is illustrated by Premier Wen Jiabao, who urged Europe to prevent its debt crisis from spreading across the bloc and to stabilise its currency and financial markets. Three-month aluminium was untraded in the rings, but bid at $2,136 a tonne from $2,085 on Thursday, zinc was bid at $1,810.50 a tonne from $1,740 and lead traded at at $1,868 from $1,790. Tin traded at $21,850 from $21,200 and nickel at $18,725 from $18,025 at Thursday's close. Metal Prices at 1219 GMT Comex copper in cents/lb, LME prices in $/T and SHFE prices in yuan/T Metal Last Change Pct Move End 2010 Ytd Pct move COMEX Cu 319.50 13.95 +4.57 444.70 -28.15 LME Alum 2128.50 43.50 +2.09 2470.00 -13.83 LME Cu 7091.00 356.00 +5.29 9600.00 -26.14 LME Lead 1869.25 79.25 +4.43 2550.00 -26.70 LME Nickel 18733.00 708.00 +3.93 24750.00 -24.31 LME Tin 21800.00 600.00 +2.83 26900.00 -18.96 LME Zinc 1803.00 63.00 +3.62 2454.00 -26.53 SHFE Alu 16165.00 125.00 +0.78 16840.00 -4.01 SHFE Cu* 51670.00 720.00 +1.41 71850.00 -28.09 SHFE Zin 14300.00 450.00 +3.25 19475.00 -26.57 ** Benchmark month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07 (Reporting by Pratima Desai, editing by Jason Neely)

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