* FTSEurofirst 300 up 0.7 percent, hits three-week high
* Chemical shares top gainers; Yara up 1.5 percent
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By Atul Prakash
LONDON, Dec 7 (Reuters) - European shares hit a three-week high on Tuesday after U.S. President Barack Obama's deal to extend tax cuts was seen helping the economy, though lingering euro zone debt worries prompted investors to stay cautious.
At 0911 GMT, the FTSEurofirst 300 index of top European shares was up 0.7 percent at 1,113.32 points, its highest since mid-November. The index is up 6 percent this year, after a 26 percent jump in 2009.
Shares in chemical companies topped the gainers list, with the sector index up 1.1 percent. Norwegian fertiliser group Yara International rose 1.5 percent after saying its prospects had improved along with demand for its nitrogen-based soil nutrient.
"The market is benefiting from the compromise in the U.S. on the extension of the Bush tax cuts and to a lesser extent from the probable voting of the Irish rescue package," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
The euro zone debt crisis remained a focus ahead of a budget vote in Ireland.
Also, the bloc's finance ministers said on Monday they would not be taking new measures to tackle the contagion, amid worries the debt crisis could spread from Greece and Ireland, which are already receiving EU bailouts, to Portugal and possibly Spain.
"Whilst there is some disappointment over the lack of EU developments yesterday, another meeting provides a further opportunity," said Keith Bowman, equity analyst at Hargreaves Lansdown.
"Nonetheless, investors will again be turning their attention to Ireland, given its budget announcement today, with individual government resolve to reduce budget deficits still high on the agenda for investors."
Financials fell, with the STOXX Europe banking index down 0.1 percent. BBVA, Bankinter and Barclays fell 0.4-1.3 percent.
RISK APPETITIE IMPROVES
Appetite for risky assets such as equities improved, with the VDAX-NEW volatility index falling 3 percent to a two-week 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 to take risk.
Retailers featured among the top gainers, with British group Tesco, the world's No.3 retailer, rising 1.7 percent after it said overseas markets drove a 7.2 percent rise in third-quarter sales.
Shares in construction and materials companies also advanced. The sector index rose 1 percent, led by Germany's biggest builder, Hochtief, up 3.2 percent.
Investors also kept a close on developments in China, which could raise interest rates in coming days to tame inflation.
Across Europe, Britain's FTSE 100, Germany's DAX and France's CAC 40 were up 0.5-0.8 percent. The Thomson Reuters Peripheral Eurozone Countries Index was up 0.5 percent. (Editing by Dan Lalor)