* FTSEurofirst 300 up 0.4 pct
* Pan-European index posts highest close since mid-2011
* Germany’s DAX eyes key resistance after strong ZEW
By Toni Vorobyova
LONDON, Dec 11 (Reuters) - European shares rose on Tuesday, with a key index scaling fresh 18-month highs thanks to signs of improvement in the German economy and traditional year-end flows into equities.
Sectors dependent on solid economic growth - such as autos , construction and basic resources - outperformed after the ZEW indicator pointed to a sharp improvement in German investor morale this month.
The upbeat news from Germany - seen as the strong spot in Europe - fed into broader seasonal optimism in equity markets, which have posted December gains in 12 of the last 15 years.
“We are enjoying the seasonality now. In equity markets in December, the trend is to the upside,” said Veronika Pechlaner, investment manager at Ashburton, which is ‘overweight’ on Europe.
“We have seen some global allocators moving funds into Europe and that is clearly an environment that has helped. But it’s clearly vulnerable to any set backs.”
The pan-European FTSEurofirst 300 closed up 0.4 percent at 1,138.85 points, its highest finish since mid-2011 and taking its gains for the past three weeks to 7 percent.
The possibility of more stimulus measures from the U.S. Federal Reserve, which kicked off a two-day meeting on Tuesday, also helped support equities.
Germany’s DAX gained 0.8 percent to 7,589.75 points, closing in on tough technical resistance around 7,600 - a level where it ran out of steam in May 2011 and which before that was last seen in 2008.
The broader index was helped by a 5.6 percent rally in Thyssen Krupp after Chief Executive Heinrich Hiesinger vowed to fix problems at the steelmaker.
Germany has been a top pick for investors slowly returning to Europe since the summer, when the European Central Bank pledged to do whatever it takes to save the euro, following that up in September with concrete plans to buy sovereign bonds.
“Since September, we have certainly seen more funds trickle through the region and investor interest has increased,” said Frederique Carrier, head of European equities at RBC Wealth Management, who recommends focusing on companies with strong finances, high dividends and good growth prospects.
“Germany has a lot of well-managed companies ... (but) we might shy away from the peripheral countries - there are enough opportunities outside.”
In the short-term, though, any gains are unlikely to be in a straight line given the still problematic euro zone debt situation and the threat to the global economy from the U.S. “fiscal cliff” of spending cuts and tax hikes due in 2013.
“We think there will be a resolution, but the market is going to respond to a lot of headlines. There is a lot of speculation and that makes markets nervous,” Carrier said.
Given the uncertainty, she advised investors to look for market entry points on a stock-by-stock basis.
For those who want exposure to a possible year-end rally but are mindful of the risks, derivatives strategists at UBS highlighted call options - the right to buy the EuroSTOXX 50 euro zone blue chip index at pre-set price.
Such options are currently quite cheap, with implied volatility on EuroSTOXX 50 down 47 percent this year - reflecting improved investor sentiment and trading at levels seen only half a dozen times in the past five years.