* FTSEurofirst 300 ends up 1.1 percent at fresh 27-month high
* Miners gain as copper hits record high on supply, dollar
* Paper company shares rise after UPM-Kymmene deal
By Harpreet Bhal
LONDON, Dec 21 (Reuters) - European shares hit a fresh 27-month closing high on Tuesday, with mining shares boosted by strong metals prices while Finnish forestry group UPM-Kymmene rose after saying it was buying a debt-laden rival.
The pan-European FTSEurofirst 300 index of top shares ended up 1.1 at 1,145.60 points, the highest closing level since late September 2008, though volumes were low due to the year-end holiday season.
The index has risen 7.2 percent so far this month, on track to post its biggest monthly gains since July 2009, and is up 9.4 percent in the year-to-date.
"U.S. economic policy has improved confidence in the outlook for growth and corporate earnings next year, and investors are taking the view that bond markets are no longer the place to be," said Mike Lenhoff, chief strategist at Brewin Dolphin.
Mining shares were lifted by a rally in metals prices, with copper hitting a record high on supply concerns after Chile's Collahuasi mine halted shipments, and on a weak dollar. Xstrata , Eurasian Natural Resources and Vedanta Resources rose 3.2 to 3.5 percent.
Also helping sentiment in the sector, Australia's biggest mining companies may have won a long-running battle with Prime Minister Julia Gillard after a tax panel recommended the government pick up future state royalty payments under its mine tax reform package.
Merger and acqusition activity helped lift individual shares. Finland's UPM-Kymmene rose 6.8 percent after the forestry group said it was buying debt-laden rival Myllykoski in a move which brings much needed consolidation to Europe's paper industry.
Rival Stora Enso added 8.4 percent.
Dutch chemical firm DSM rose 3.9 percent after the world's largest vitamins maker said it was buying U.S. baby food ingredients maker Martek Biosciences Corp for $1.1 billion, kicking off an expected acquisition spree..
Other gainers included Carnival, which added 3.7 percent after the world's largest cruise operator reported a rise in fourth-quarter profit and it issued a 2011 forecast that exceeded estimates.
DEBT FEARS LINGER
Concerns over the euro zone debt crisis lingered as ratings agency Moody's said it may cut Portugal's credit rating, and Spain had to pay a higher price in its final debt sale of the year.
China said it backed the steps taken by European authorities to tackle the region's debt problems, but made clear it would like to see the measures having more effect.
"The sovereign debt crisis will be a risk to growth and a source of instability for markets in 2011. The pressure is mounting on the European Union to do something to deal with the problem," Lenhoff said.
On the downside, BSkyB fell 0.7 percent, reversing earlier gains, after British Business Secretary Vince Cable says he had "declared war" on media magnate Rupert Murdoch raising question marks over the likelihood of Murdoch's News Corp succeeding in taking full ownership of the pay-TV operator.
On the technical front, indicators pointed to a bullish trend for equity markets. The Euro STOXX 50, the euro zone's blue-chip index, rose 1.3 percent to 2,876.99 points, holding above its 61.8 percent Fibonacci retracement from a high in April to a low in May.
"This is the traditionally best season of the year. On top of this, active money managers have had one of the worst years in history. So, they try to play catch-up and buy every dip," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, in Brussels. (Additional reporting by Atul Prakash; Editing by Jon Loades-Carter)