* FTSEurofirst 300 up 0.1 pct, Euro STOXX 50 flat * FTSEurofirst up for 16th time in past 18 sessions * Most indexes slipping into 'overbought' territory * Peugeot up on stake report, hedge cuts short position * BofA-Merrill strategists bet on 'shunned' Europe stocks By Blaise Robinson PARIS, Dec 12 European shares edged higher on Wednesday, extending a steep three-week rally as investors bet the Federal Reserve will unveil a new round of bond-buying to support the U.S. economy. At 1150 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 percent at 1,139.57 points, after hitting an 18-month high earlier in the session. However, the benchmark index - which has risen in 16 of the past 18 sessions - has gained 7 percent since mid-November, fuelling expectations of an imminent pull-back. "The market's winning streak has been quite phenomenal, something we haven't seen in many years. But volumes have been anaemic, and a low-volume rally is always suspicious," Talence Gestion fund manager Alexandre Le Drogoff said. "Indexes such as the Euro STOXX 50 and the CAC 40 have pierced above key resistance levels, but we need them to close the week above these levels to really confirm the 'buy' signal, and we're not there yet. We could quickly lose 2 percent." Volumes were very low on Wednesday for most European benchmark indexes. Around midday, the volume represented only between 22 and 30 percent of the average daily volume for the past three months. Basic resources shares were among the biggest gainers, with Anglo American up 1.9 percent after Barclays upgraded its rating on the stock to "equal weight" from "underweight". Troubled French car maker PSA Peugeot Citroen surged 7 percent, boosted by a report on La Tribune website saying the government of Algeria could buy a stake in the company. Traders also mention a recent move by UK hedge fund Marshall Wace to reduce its short selling position on Peugeot, which has been in the crosshairs of short sellers for months. Investors awaited the end of the Fed's two-day policy meeting, with the central bank expected to replace its expiring Operation Twist programme of Treasuries purchases with a new bond buying plan which will further expand the central bank's balance sheet. European shares have strongly rallied over the past six months, with the Euro STOXX 50 surging nearly 30 percent, propelled by significant measures unveiled by central banks to support growth and fight Europe's debt crisis. Charts show the FTSEurofirst 300 - along with UK's FTSE 100 index, Germany's DAX, France's CAC 40 and the euro zone's blue chip Euro STOXX 50 - slipping into 'overbought' territory, with their relative strength index (RSI), a closely-watched momentum indicator, above 70. "The market is getting 'overbought', which doesn't happen very often. We're ripe for at least a pause, and maybe a pull-back," said Kepler Capital Markets trader Patrice Perois. "Volumes have been extremely low, which means that the rally remains fragile regardless of the newsflow." Around Europe, Britain's FTSE 100 index was up 0.2 percent, Germany's DAX index up 0.3 percent, and France's CAC 40 down 0.1 percent. Spain's IBEX and Italy's FTSE MIB, far from being technically 'overbought' after a recent pull-back, were both up 0.3 percent. Despite the risk of a pull-back in the short term, strategists at Bank of America Merrill Lynch bet on European stocks for the first half of next year. "We favour European stocks, including mining companies and German auto stocks, over the first half of 2013, as the capitulation into the shunned assets of recent years is completed," BofA-Merrill strategists wrote in their 2013 strategy outlook. The strategists see the Euro STOXX 50 rising around 16 percent to 3,000 points by the end of next year.