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European stocks extend new-year rally; Spain lags

* FTSEurofirst 300 gains 0.9 percent, up 2.7 percent in 2011

* Index hits highest level since mid-September 2008

* Spanish stocks lag, hit by nagging debt worries

* For up-to-the-minute market news, click on [STXNEWS/EU]

By Blaise Robinson

PARIS, Jan 6 (Reuters) - European stocks were higher by midday on Thursday, adding to a brisk new-year rally on expectations of strong U.S. jobs data on Friday, while nagging worries over Spain’s debt weighed on Spanish stocks.

By 1240 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was up 0.9 percent at 1,152.19 points, a level not seen since mid-September 2008.

The euro zone's blue-chip Euro STOXX 50 .STOXX50E index was up 0.9 percent at 2,859.27, with key resistance looming at 2,890, a closing high in mid-November.

“Yesterday’s Japanese candlestick shows a long lower shadow which signals strong buying appetite,” said Alexandre Le Drogoff, technical analyst at Aurel BGC, in Paris.

“However, we still have to wait to see if the index manages to close above 2,890 points, or below 2,788 points to determine the next short-term trend.”

Shares of financial institutions, which had underperformed the broad market in 2010, featured among the top gainers on Thursday, with Credit Suisse CSGN.VX up 2.9 percent, UBS UBSN.VX up 2.5 percent and AXA AXAF.PA up 4.6 percent.

The rally, however, was clouded by a drop in shares of Spanish banks, hurt by nagging worries over the country's debt level. Santander SAN.MC was down 0.6 percent, BBVA BBVA.MC down 1 percent and Bankinter BKT.MC down 0.4 percent.

After dropping 17 percent last year, Spain's IBEX .IBEX has lost 0.4 percent since the beginning of the year, falling behind the 2.7 percent rally on the FTSEurofirst 300.

“There is still a lot of hesitation. Investors await the first big sovereign debt auctions in the euro zone to see how it goes, and if this week’s Portuguese T-bill auction is any indication, it’s going to be a bumpy road,” said Catherine Garrigues, head of equities at Allianz Global Investors Europe.

“However, macro data is quite good, and valuation levels remain low.”

Forecast-beating U.S. private-sector jobs figures on Wednesday helped boost sentiment, ahead of the key U.S. payrolls figures expected on Friday.

Despite the sharp December rally and the gains so far in 2011, European stock valuation levels remain relatively low, with the STOXX Europe 600 .STOXX carrying a forward price-to-earnings (P/E) ratio of 10.8, below a 10-year average of 13.7, according to Thomson Reuters Datastream.

This compares with a forward P/E ratio of 13.1 for Wall Street's S&P 500 .SPX.

Around Europe, UK's FTSE 100 index .FTSE was up 0.7 percent, Germany's DAX index .GDAXI up 1.2 percent, and France's CAC 40 .FCHI up 0.9 percent.

ARM Holdings ARM.L rose 7.6 percent after Microsoft MSFT.O said it plans to design a Windows operating system compatible with chips designed by the British firm.

Hermes HRMS.PA fell 3 percent after French market regulator AMF granted Hermes family shareholders a buyout waiver after they pooled their holdings as a takeover defence following LVMH's LVMH.PA surprise stake buying.

Draka DRAK.AS fell 8.4 percent after China's Xinmao Group dropped its 1 billion euro ($1.31 billion) cash bid for the Dutch cablemaker, leaving Italy's Prysmian PRY.MI free to seal its own deal with Draka. Prysmian surged 7.9 percent. (Reporting by Blaise Robinson) ($1=.7609 Euro)

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