* FTSEurofirst 300 up 0.4 percent, near two-yr highs
* Miners gain on stronger metals prices
* Financials slip; RBS sees market conditions challenging
* For up-to-the-minute market news, click on
By Brian Gorman
LONDON, Nov 5 (Reuters) - European shares rose close to a two-year high on Friday, with miners among the biggest gainers, after a key report showed the U.S. labour market was stronger than expected.
But banks capped gains for key indexes, after Royal Bank of Scotland reported a loss, and euro zone debt worries resurfaced.
U.S. employment increased more than expected last month as private companies hired workers at the fastest pace since April, offering more signs of an up-tick in a sluggish economy.
"It was a stunning turnaround but you have to question whether it is sustainable," said Peter Dixon, economist at Commerzbank. "But for now, with the quantitative easing (QE) announced on Wednesday, it is a win-win for equities."
By 1242 GMT, the FTSEurofirst 300 index of top European shares was up 0.4 percent at 1,111.36 points, the highest since mid-April, and less than 0.4 percent off a two-year high.
The index surged 1.7 percent on Thursday on the U.S. Federal Reserve's decision to buy $600 billion in government bonds to help the U.S. economy.
LONDON COPPER HITS 27-MONTH HIGH
Miners were among the best performers on Friday, as metal prices rallied sharply with Shanghai zinc jumping 5 percent and London copper rising to fresh 27-month highs. Traders said it was partly a delayed reaction to QE.
Eurasian Natural Resources Corp., Fresnillo and Vedanta rose between 1.2 and 3.2 percent.
However, Spanish banking shares Banco Santander and BBVA fell 2.9 and 1.7 percent respectively, dragged lower by fears about the instability of the peripheral euro zone economies and the risk of more capital hikes in the sector.
Euro zone peripheral debt "is coming back as an issue and some of the Greek and Spanish banks are underperforming," said Colin McLean, managing director at fund manager SVM in Edinburgh. Bank of Ireland fell more than 10 percent, and has lost half its value in the last three months, on worries about the state of the Irish economy.
The Irish government side-stepped questions on Friday about when it would unveil a four-year austerity plan amid speculation it would delay publishing the measures in the run-up to a by-election.
"We have Ireland with a real estate problem, which is much bigger than expected, and people extrapolate that to the rest of the euro zone," said a Madrid-based trader.
Royal Bank of Scotland fell 4.5 percent after it said it expected challenging market conditions in the fourth quarter, and a UK bank tax would add up to 250 million pounds to its costs next year.
HSBC fell 1.8 percent, even after saying profits so far this year are "well ahead" of 2009 levels. Analysts at Matrix said the update was "quite weak" and that it expects consensus downgrades.
Across Europe, Britain's FTSE 100, France's CAC40 AND Germany's DAX rose between 0.2 and 0.4 percent.
Spain's IBEX was 1 percent lower. Back in the U.K., drugmaker GlaxoSmithKline rose 2.2 percent as worries about generic competition to its best-selling Advair lung drug eased, following comments from Israeli-based drugmaker Teva.
Smith & Nephew gained 6.1 percent after the orthopaedic products firm reported third-quarter results, with Seymour Pierce keeping its "buy" rating on a "well-positioned medtech story." (Additional reporting by Simon Falush; Editing by Sharon Lindores)