* FTSEurofirst 300 flat, EuroSTOXX 50 up 0.3 pct
* Technicals point to risk of more downside
* Telecom Italia up as Telefonica agrees to raise stake
By Toni Vorobyova
LONDON, Sept 24 (Reuters) - European shares steadied on Tuesday as merger and acquisition activity in the telecoms sector was countered by weak German data and concerns about U.S. fiscal and monetary policy that kept the main index below recent 5-year highs.
Telecom Italia jumped as much as 4.8 percent after Telefonica agreed to raise its stake in the Italian firm, adding to the recent chain of deals involving European companies.
That helped the FTSEurofirst 300 hold flat at 1,256.61 points at 1007 GMT - lacking any further momentum to re-test last week's 5-year peak of 1,274.59 after the closely-watched Ifo index showed German business morale improving less than expected last month..
"There is a general feeling of more deal activity. I am still fairly bullish (on equities). If there is decent M&A activity and the underlying economy is improving a bit ... then it's all adding to the overall picture of optimism," said Neil Marsh, strategist at Newedge.
"But I think there is still a lot of caution around."
With the domestic economy recovering slowly, the United States remains a key market for European companies, making their shares vulnerable to any jitters there. Expectations of reduced stimulus in the United States - which abated when the Federal Reserve left policy unchanged at last week's meeting - were reignited by New York Fed President William Dudley on Monday.
The influential official said the U.S. central bank still aims to scale back the pace of its asset purchases later this year as long as the economy keeps improving.
Continued political discord over the U.S. budget also kept markets on edge, raising the prospect of a federal government shutdown if a deal is not struck by month-end.
Towards the end of the morning session the EuroSTOXX 50 gauge of euro zone blue chips was 0.3 percent higher at 2,914.99 points. The technical outlook was dimmed by the index erasing last week's post-Fed rally the previous session.
"A pull back towards 2,854 points is expected and above this support level the index remains bullish over the long run," said David Furcajg, technical analyst at 3rd Wave Consult.
"In case of a deeper consolidation, short the insurance sector."