* FTSEurofirst 300 up 1.1 percent
* VSTOXX at level last seen mid-2007
* Miners firm, Rio Tinto leads
By Tricia Wright and Sudip Kar-Gupta
LONDON, Nov 29 (Reuters) - A leading European share index hit its highest closing level since July 2011 on Thursday, led by mining stocks, on increased optimism that U.S. politicians would reach a deal to avoid growth-sapping austerity measures.
The pan-European FTSEurofirst 300 index ended up 1.1 percent at 1,121.83, while the euro zone's blue-chip Euro STOXX 50 index gained 1.4 percent to 2,581.69 points, in its highest close since mid-September.
Equity markets were buoyed by comments from U.S. President Barack Obama that he hoped to reach a deal before Christmas to avoid the looming "fiscal cliff" of automatic tax hikes and spending cuts that could hit the U.S. economy.
"It's all lining up quite nicely for a strong end to the year. It's still 'risk-on' for us," said MB Capital trading director Marcus Bullus, who said he was eyeing a breach of 7,475 points on Germany's DAX index as an important near-term positive signal. It stood Thursday at around 7,400 points.
In a strong signal of growing appetite for equities, the Euro STOXX 50 implied volatility index, or VSTOXX, hit a more than five-year low on Thursday.
The VSTOXX, based on put and call options on Euro STOXX 50 stocks, fell to 16.49, a level not seen since mid-2007 in the run-up to the U.S. subprime crisis which dragged the world into its worst economic crisis since the Great Depression.
Mining stocks, seen as among the most "risky" equity sectors since they are more sensitive than others to changes in economic sentiment, were the best performers. The STOXX Europe 600 Basic Resources index ended up 2.6 percent.
Rio Tinto rose 5.1 percent, the second-top FTSEurofirst 300 riser. The global miner is aiming to axe $7 billion in costs over the next two years as it faces weaker commodity prices.
MORE CAUTIOUS APPROACH
Some investors, however, adopted a cautious approach, expecting markets to be jostled around in coming weeks by contrasting headlines concerning whether a budget deal can in fact be clinched in Washington.
U.S. government debt prices turned higher on Thursday after remarks from U.S. House of Representatives Speaker John Boehner, which lowered hopes of a budget deal soon.
"I'm afraid I think it's going to be volatile. We're going to have one day where it's all looking a bit better, the next day it's all looking a bit worse, the next day it's all looking a bit better, and the following day a bit worse," said Allianz Global Investors' Neil Dwane.
"I think this will go right to the edge and maybe over it because I think in the end there are in fact very little incentives for people - both the Democrats and the Republicans - to agree," said Dwane of Allianz Global Investors, which has around 300 billion euros ($389.4 billion) assets under management.
Among fallers on Thursday, Kingfisher dropped 0.6 percent after the home improvements retailer said uncertainty over the French government's budget plans had knocked consumer confidence, and that it was hard to see when trading conditions might improve in the UK.
Trading volume in Kingfisher was solid, at nearly twice its 90-day daily average.
"Anyone who's servicing domestic demand in Europe is finding life very difficult right now," said Ben Ritchie, senior investment manager at Aberdeen Asset Management, which has 187 billion pounds of assets under management.
"Where companies have offered guidance they have, broadly speaking, I think disappointed the market with their outlook. I think looking out to next year, it's going to be difficult."
Companies that Ritchie reckons can do well even in a difficult macroeconomic environment include Swedish lock maker Assa Abloy and British specialty chemical company Croda International.