* FTSEurofirst 300 ends 1.5 percent up; touches 28-month high
* Peripheral stocks surge, Spain's IBEX 35 gains 5.4 percent
* Risk appetite rises; volatility index hits 1-month low
By Atul Prakash
LONDON, Jan 12 (Reuters) - European shares hit a 28-month high on Wednesday as sentiment improved following strong demand for Portugal's debt, while a rally in metals prices boosted resource-related equities.
Appetite for risky assets grew, with the VDAX-NEW volatility index down 6 percent to a one-month low. The lower the index, which is based on sell and buy options on Frankfurt's top 30 stocks, the higher the market's desire for risk.
The FTSEurofirst 300 index of top European shares finished 1.5 percent firmer at 1,163.94 points, the highest close since September 2008.
Spanish stocks led the rally, with the country's benchmark index IBEX 35 surging 5.4 percent. Banco Santander, BBVA and Bankinter gained 4.8 to 9.9 percent. The European banking index, up 4.8 percent, topped the sector gainers' list.
Investors were reassured after Portugal sold 1.249 billion euros ($1.62 billion) in two bond maturities to strong demand, lifting some pressure off the indebted country to seek a bailout and easing fears over Spain's bond auction scheduled for Thursday.
Spain is also under pressure because of its high level of debt.
"It's a bit of relief from the fear that was running really high some days ago. There was talk that Portugal could be asking for help very soon," said Klaus Wiener, chief economist at Generali Investments in Cologne.
"Equity markets are rising because we have a fairly decent global macroeconomic backdrop. The fast growing regions are still powering ahead and we see growth accelerating in the U.S. as well," he added.
"The auction showed that for the time being Portugal is still able to access financial markets, if at a price," said ING economist Paolo Pizzoli.
"With planned gross issuance for 2011 in the likes of 20 billion euros, the bulk of the tests have yet to come: other key passages will likely have to be faced soon, as redemptions are concentrated in April and June."
TECHNICAL OUTLOOK
The technical picture improved as the euro zone's blue chip Euro STOXX 50 rose 3 percent to 2,879.11, breaking above two key resistance levels -- the index's 50-day moving average and the 38.2 percent Fibonacci retracement of its drop from a 2007 high to a 2009 low -- sending a positive signal.
Resource-related shares were in demand as key base metals prices surged on encouraging economic data and expectations of stronger demand from top metals consumer China.
The STOXX Europe 600 Basic Materials index jumped 2.1 percent, while Anglo American and ENRC gained 3.4 percent and 4.4 percent respectively.
EADS was up 2.1 percent after hitting a two-year high as planemaker Airbus unveiled what it called the biggest jet order in commercial aviation history with a $15.6 billion deal to sell 180 planes to Indian budget carrier IndiGo.
Around Europe, Britain's FTSE 100, Germany's DAX and France's CAC 40 rose 0.6 to 2.2 percent. Portugal's PSI 20 was up 2.6 percent, while Italy's FTSE MIB climbed 3.8 percent.
"Despite the quiet confidence that seems to have settled among markets throughout today, the European recovery is in its infancy yet, and it remains to be seen whether this positivity is the start of a genuine turnaround in Europe," IG Index trader Ben Critchley said.
(Additional reporting by Blaise Robinson; Editing by Erica Billingham)