Real estate stocks were the top performers in Europe on Thursday morning as immediate concerns over prospects for the highly leveraged sector eased after a heavy drop in March that dragged it close to 10-year lows hit last year.

Investors though remained wary of more pain ahead for the industry with property prices looking set to fall further as the economy weakens, while tighter credit conditions make it harder for some companies to refinance debt.

"At these levels, a bit of bad news is in the prices. Nevertheless, I believe prospects for real estate remain ugly," said Giuseppe Sersale, fund manager at Anthilia in Milan. "I remain in the camp of those seeing a recession coming."

Sweden's Castellum , SBB, Wallenstam , Aroundtown and Vonovia in Germany and Dutch-listed Unibail-Rodamco led real estate stock gainers, up more than 4%.

Some of these companies are highly shorted by investors seeking to make gains from a fall in their share prices.

The STOXX Europe Real Estate index was up 2.8% by 0843 GMT, leading sectoral gainers in the region, although it was still down more than 13 % so far in March. The broader STOXX 600 equity benchmark index was up 0.9% on the day.

Citi warned this week the potential downside for real estate stocks in Europe could exceed 50%, should the market test 2009 trough price-to-earnings valuations. Analyst also see bigger risks that real estate companies in continental Europe may have to tap shareholders to beef up their finances. (Reporting by Danilo Masoni; Editing by Amanda Cooper)