European shares higher at midday; banks gain

* FTSEurofirst 300 index up 0.7 percent

* Germany's ZEW confidence reading beats expectations

* Banking sector gains ahead of Fed meeting

By Brian Gorman

LONDON, March 16 (Reuters) - European shares were marginally higher by midday on Tuesday after a key indicator of German confidence fell less than expected and amidst some optimism about a resolution to Greece's debt problems.

Banks advanced ahead of the outcome of the U.S. Federal Reserve's interest rate-setting meeting, after European markets close.

At 1126 GMT the pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.7 percent at 1,058.20 points after falling 0.7 percent in the previous session.

The index is up 64 percent from a record low in March 2009, boosted since then by the effects of government stimulus programmes and lower interest rates in major economies. The heavyweight banking sector added the most points to the index. HSBC (HSBA.L), BNP Paribas (BNPP.PA), UBS (UBSN.VX) and Credit Suisse (CSGN.VX) gained 1.3-2.1 percent.

German analyst and investor sentiment fell for the sixth month running in March, but dropped by less than expected. The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment came in at 44.5 in March, down from 45.1 in February. The consensus forecast in a Reuters poll of 43 economists last week was for a fall to 43.7. [ID:nDEP003287]

Meanwhile EU finance ministers on Tuesday discussed standby plans drawn up by countries using the euro to provide Greece with financial help if it becomes the first state in 11 years of euro zone monetary union to seek such aid. [ID:nLDE62F0D9]

"The developments on Greece will be taken as a positive, although the proof of the pudding will be in the eating," said Andy Lynch, fund manager at Schroders.

He added: "The story isn't over. We'll still be talking about Greece in the third and fourth quarter."

Looking to the United States, analysts expect the Federal Reserve to say that it will keep U.S. interest rates low for an extended period.

"If they say anything different, that will give the market a bit of a kicking," Lynch said.

Energy share prices were higher, as oil futures CLc1 edged back above $80, following a steep drop on Monday. Royal Dutch Shell (RDSa.L) was up 1.3 percent after it said it was planning a return to robust growth in oil and gas production after years of decline. [ID:nLDE62E1DJ]

BP (BP.L), Statoil (STL.OL) and Total (TOTF.PA) rose between 0.7 and 1.2 percent.

Across Europe, the FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC 40 .FCHI were up between 0.5 and 0.9 percent.

LINDT RISES

Among individual companies, Swiss chocolate company Lindt & Spruengli (LISP.S) rose 5.4 percent. The company said it expects to return to its long-term growth targets in 2011 after subdued consumer demand for its products and high cocoa prices ate into profits in 2009. [ID:nLDE62E0QX]

ArcelorMittal (ISPA.AS) was up 1.8 percent after it said it has inked a preliminary agreement with its Turkish partner Dayen to set up a steel mill in Northern Iraq. [ID:nLDE62F0CU]

Neste Oil (NES1V.HE) rose 5.1 percent after Danske Bank upgraded the Finland-based firm to "buy" from "accumulate".

February's U.S. housing starts figures are due at 1230 GMT, an hour before Wall Street opens. (Editing by Greg Mahlich)