European shares edge higher on recovery optimism

* FTSEurofirst 300 <.FTEU3> up 0.3 percent

* Smith & Nephew up on takeover report

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

By Brian Gorman

LONDON, Dec 8 (Reuters) - European shares edged up on Wednesday, near a two-year high, as prospects for further economic recovery outweighed worries about sovereign debt levels in the euro zone.

At 1002 GMT, the FTSE Eurofirst 300 <.FTEU3> index of top European shares was up 0.3 percent at 1,119.41 points, having moved in and out of positive territory. It had risen 0.9 percent in the previous session, when it hit its highest intraday level since September 2008.

U.S. tax cuts and the prospect of further monetary stimulus, have boosted optimism about economic recovery, though investors remain worried about the euro zone's debt troubles.

"The euro zone debt crisis hasn't gone away. Spain remains the thing to watch," said Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin.

"But it will not be enough to stop a rally in global equity markets. The data, especially PMIs, has been reasonably good, with good figures out of Germany, though the U.S. labour market data has been disappointing."

Bid speculation helped Smith & Nephew rise 4.5 percent. The Daily Mail newspaper's market report noted talk of a 7.1 billion pound, or 8 pounds-a-share cash offer from a U.S. consortium of private equity players for the maker of replacement knees and hips. Smith & Nephew was not immediately available for comment.

Heavyweight banks to edge up included Credit Suisse and Societe Generale , 0.9 and 1.3 percent higher respectively.

A stronger dollar helped to weaken metals prices, but mining shares were little changed, paring earlier losses. The dollar extended gains on Wednesday on a spike in U.S. Treasury yields as a proposed extension of tax cuts raised growth expectations for the U.S. economy.

Across Europe, Britain's FTSE 100 <.FTSE> was flat; Germany's DAX <.GDAXI> was down 0.1 percent and France's CAC40 <.FCHI> rose 0.2 percent.

The Thomson Reuters Peripheral Eurozone Countries Index <.TRXFLDPIPU> was up 0.1 percent.

PRUDENTIAL RISES

British insurer Prudential rose 2.4 percent after UBS upped its price target. Other insurers to rise included Allianz , AXA and Zurich Financial , up between 1.6 and 2 percent.

European aerospace group EADS rose 2.7 percent after Chief Financial Officer Hans Peter Ring said in a newspaper interview that he expected profit to improve significantly in 2012. [ID:nLDE6B70GB]

On the macro front, German exports fell unexpectedly in October while imports rose to a record high, narrowing the trade surplus in a sign that domestic growth is gaining pace, official data released on Wednesday showed. [ID:nLDE6B61S1]

Political tensions remained a factor for investors, after North Korea fired artillery shells in a suspected military drill on Wednesday. [ID:nN08113240]