* FTSEurofirst 300 up 0.4 pct; highest close since late 2008
* Banking, Insurance shares feature among top gainers
* Smith & Nephew jumps 9.1 percent on bid speculation
By Atul Prakash
LONDON, Dec 8 (Reuters) - European equities hit a 26-month closing high on Wednesday, boosted by banking and insurance shares, as investors bet that concerns about the euro zone debt crisis will slowly abate and financials will perform well.
The technical picture also improved as the Euro STOXX 50, the euro zone's blue-chip index, rose 0.6 percent to close above its 50-day moving average and the 61.8-percent Fibonacci retracement from a high in April to a low in May.
The FTSEurofirst 300 index of top European shares finished 0.4 percent firmer at 1,119.51 points, the highest close since September 2008.
Insurers were the top gainers, with the sector index rising 2.1 percent. Prudential rose 3.7 percent as UBS added it to its "key calls" list. Zurich Financial, AXA and Aviva rose 1.6 to 3.1 percent.
"The euro zone debt situation is going to remain in people's minds for a long time, but we should distinguish between solvency and liquidity. Solvency risk is going to stick around, but there are measures in place now to prevent contagion risk from escalating," RBS strategist Graham Bishop said.
Yields on German government bonds, normally seen as a safe haven by investors, rose as uncertainty over how to stem the euro zone's debt crisis hit even Europe's strongest economy.
Germany and France are pushing for an EU summit next week to approve a proposed treaty change that would allow debt-stricken euro zone states to make an orderly default, with private sector bondholders sharing losses on a case-by-case basis.
The FTSEurofirst 300 index witnessed a choppy session on Wednesday, rising as high as 0.9 percent to 1,125.95 points before giving up almost half of the gains.
"The market has been slightly unsettled by a jump in U.S. bond yields as the extension of tax cuts by President (Barack) Obama has refocused attention on the U.S.'s massive budget deficit," said Angus Campbell, head of sales at Capital Spreads.
"This recent political gambit has reminded us of a monster that's recently been in hiding. The U.S. is ignoring the pressures on their own economy by pushing their problems further down the line and refusing to take the axe to their fiscal inefficiencies."
U.S. Treasury prices plunged, pushing benchmark yields to a six-month high, after a deal to extend tax cuts fuelled fears of inflation and a swelling budget deficit.
FINANCIALS ADVANCE
Banks were in demand, with the STOXX Europe 600 banking index rising 1.4 percent. Allied Irish Banks jumped 11.6 percent, while BBVA gained 3 percent.
Bid speculation helped Smith & Nephew rise 9.1 percent. The Daily Mail noted talk of a 7.1 billion pound cash offer from a U.S. consortium of private equity players.
Britain's FTSE 100 and Germany's DAX fell 0.2 percent and 0.4 percent respectively, but France's CAC 40, Ireland's ISEQ, Spain's IBEX and Italy's FTSE MIB rose 0.6 to 1.6 percent.
Reuters polls of around 300 equity market strategists and fund managers found that major stock markets around the world will likely make steady gains in 2011.
"The global macro picture continues to improve, making a general double-dip scenario increasingly less likely," said Lothar Mentel, chief investment officer at Octopus Investments.
"However, before getting carried away by bullishness, it needs to be remembered that sentiment continues to be fragile, with a large number of institutional investors still very bearish, expecting the next catastrophic event behind every piece of bad news." (Editing by David Holmes)