Europe shares inch higher on prospect of U.S. debt deal


* FTSEurofirst 300 up 0.2 pct, Euro STOXX 50 down 0.1 pct

* Euro STOXX 50 hovering around 2-1/2 year high

* Stocks still in 'sweet spot', says Lyxor AM'sAsseraf-Bitton

By Blaise Robinson

PARIS, Oct 11 (Reuters) - European stocks inched up in earlytrade on Friday, extending the previous day's rally, asinvestors waited to see if an agreement will be reached inWashington on the U.S. debt ceiling.

At 0740 GMT, the FTSEurofirst 300 index of top European shares was up 0.16 percent at 1,247.09 points, aftergaining 1.7 percent on Thursday.

The euro zone's blue-chip Euro STOXX 50 indexwas down 0.08 percent at 2,967.06 points, hovering just below a2-1/2 year high hit earlier in the session.

Stocks around the world had lost ground in the past threeweeks after a deadlock in budget talks led to a partial shutdownof the U.S. government and sparked worries about negotiations onthe country's debt ceiling.

On Thursday, President Barack Obama and Republican leadersappeared ready to end the deadlock after meeting at the WhiteHouse, and talks continued into the night with one seniorRepublican saying an agreement could come on Friday.

"Even though investors get nervous when political tensionsrise, the backdrop for equities remains quite positive: veryaccommodative central banks, improvement on the macro front, andrelatively good corporate fundamentals," said JeanneAsseraf-Bitton, head of global cross asset research at LyxorAsset Management, which has $98 billion under management.

"It's sort of a 'sweet spot' for stocks. Now, with theearnings season set to start, we need to see an improvement inthe earnings momentum. It has improved lately in Europe,although it remains negative for now."

Around Europe, UK's FTSE 100 index was up 0.2percent, Germany's DAX index up 0.2 percent, andFrance's CAC 40 down 0.1 percent.

French hotel group Accor topped the FTSEurofirst300 leader board, with a 2.5 percent rise after investment bankCitigroup's upgraded the stock to a "buy".

Darren Courtney-Cook, head of trading at Central MarketsInvestment Management, said even a short-term extension to theU.S. debt limit would be enough to soothe investors' nerves.

"Even if they just kick the can down the road again, thefact that there won't be a default is why the markets would takeit so positively. There may be some volatility going up to thewire, but most people expect a year-end rally," he said.

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