Banks, commods lead European shares higher

* FTSEurofirst 300 index rises 1.4

* Banks, commods gain

* Economic data paints bleak picture ahead

By Joanne Frearson

LONDON, Jan 2 (Reuters) - European shares pushed higher at midday on Friday, with banks and commodities taking the lead on the first trading day of the year, despite a dismal reading in the Euro Zone manufacturing index and UK house prices falling more than expected. By 1137 GMT, the pan-European FTSEurofirst 300 .FTEU3 index of top European shares was up 1.4 percent at 843.32 points. The index finished 2008 with a slump of 45 percent.

"In the face of bad economic news flow, the markets have held up very well and are well off their bottoms. Markets are saying we have been discounting all this bad news for the past year and are now holding up," said Mike Lenhoff, strategist at Brewin Dolphin.

"Markets in the past have also tended to do well at the start of the year and the rise could be attributed to a strong seasonal effect," added Lenhoff.

On the economic front there was little to cheer about. Manufacturing activity in the euro zone sank to a record survey low in December, below an already dire flash reading, while the outlook remained grim as new orders also sank to new lows. [ID:nL2197753]

In the UK, house prices in Britain fell by a bigger-than expected 2.2 percent in December for an annual drop of 16.2 percent, the country's biggest mortgage lender Halifax said. [ID:nLAJ000130]

"The good news about this year is that people have been so pessimistic at the beginning of this year as opposed to being so optimistic at the beginning of last year, they may have overdone the pessimism," said Justin Urquhart Stewart, investment director at Seven Investment Management.

"And that's quite sensible because there are some huge challenges to face. The thing people should remember is that equity markets generally recover in a recession, but it's like trying to fight your ways through the dust after the explosion's gone off," he said.

Banks led the risers on the index. HSBC (HSBA.L), HBOS HBOS.L, Nordea Bank (NDA.ST), Royal Bank of Scotland (RBS.L) and Lloyds TSB (LLOY.L) were 1.8-6.6 percent higher.

The banking index .SX7P lost almost 65 percent in the past year.

Energy stocks also featured as big gainers on the index despite crude CLc1 falling nearly 7 percent, retreating from a 14 percent rally in the previous session. BG Group (BG.L), BP (BP.L), Royal Dutch Shell (RDSb.L) and Total (TOTF.PA) were up 2.1-2.45 percent. Mining stocks also performed well. Analysts said expectations of more grim U.S. economic data could spark safe-haven buying in gold from investors. Anglo American (AAL.L), BHP Billiton (BLT.L), Eurasian Natural Resources (BLT.L) and Xstrata (XTA.L) were up 6-10.3 percent.

DEFENSIVES FALL, SOFTWARE SERVICES RETREAT

The only sector in the red was software and computer services. Cap Gemini (CAPP.PA), Dassault System (DAST.PA) and SAP (SAPG.DE) slipped 0.9-2.7 percent.

Defensive stocks were also in doldrums as investors switched into the more riskier asset classes. Drug makers AstraZeneca (AZN.L) and GlaxoSmithKline (GSK.L) were down 1.3 and 1.95 percent respectively.

In the tobacco sector, Imperial Tobacco (IMT.L) fell 0.6 percent.

Across Europe, the FTSE 100 .FTSE index was up 1.2 percent, Germany's DAX .GDAXI was 1.8 percent higher and France's CAC 40 .FCHI was up 1.9 percent.

Later in the session, investors will be waiting for the release of the U.S. December manufacturing index at 1500 GMT with economists in a Reuters survey expecting a reading of 35.5 versus 36.2 in November. (Reporting by Joanne Frearson; Editing by Hans Peters)