European shares slightly higher as German woes cap U.S. optimism

LONDON Dec 7 (Reuters) - European shares traded fractionally higher early on Friday, consolidating 18-month highs, as a worsening economic outlook for Europe tempered some optimism about U.S. budget negotiations.

Sentiment was underpinned by signs the White House and Republicans had resumed private talks on delaying a January "fiscal cliff" of scheduled tax rises and spending cuts, which could stall the world's largest economy.

The FTSEurofirst 300 index of top European shares traded 0.2 percent higher at 1,133.95 points, extending a 7 percent rally since mid-November on expectations the fiscal cliff will be avoided.

But Germany's Dax was up just 0.1 percent after the Bundesbank cut its growth outlook for Europe's largest economy next year on Friday as the euro zone debt crisis takes its toll on the bloc's largest economy.

"If you want to capture the year end rally you'll have to be long," Justin Haque, a broker at Hobart Capital Markets, said, adding that markets could take a turn for the worse in 2013.

"You cannot stand in the way of the numbers, which tell us Europe will be in a recession next year and earnings will be poor," he said.