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* FTSEurofirst 300 up 0.3 percent
* VSTOXX implied volatility lowest since March
* Banks underperform on French downgrade, Italy concerns
By Toni Vorobyova
LONDON, Nov 20 (Reuters) - European equities edged higher on Tuesday, building on the previous session's strong gains and bolstered by expectations that euro zone finance ministers will approve the next tranche of bailout cash for Greece.
Top officials signalled they were hopeful the Tuesday evening meeting would result in a solution, avoiding a fresh escalation of the euro zone crisis and the threat of bankruptcy for Athens. However, issues remain and a deal on debt reduction may be subject to more negotiations.
"It's just short covering ahead of this evening's meeting of EU finance ministers," said Markus Huber, trader at ETX.
"They have basically promised that they would find a solution ... It's a typical pattern. Ahead of the meetings you always go up, and then they usually disappoint and we come back the next day."
The FTSEurofirst 300 closed up 0.3 percent at 1,094.46 points, with its rebound from a session low of 1,087.08 points also supported by stronger than expected U.S. housing starts data and gains on Wall Street.
The EuroSTOXX 50 added 0.6 percent, building on the previous session's 2.8 percent rise and touching its highest levels in nearly two weeks. The VSTOXX index of implied volatility on the euro zone blue chips fell to its lowest level since March, pointing to improved investor risk appetite.
Low volumes, however cast doubt over the conviction of the rally, with just 84 percent of the average 90-day daily volume traded on the FTSEurofirst 300.
Notable exceptions were Xstrata and Glencore , which added 1.6 and 3.1 percent, respectively, in around tripple the usual volumes after Xstrata shareholders backed their merger.
Banks underperformed, falling 0.5 percent after Moody's downgraded the French sovereign rating and rekindled concerns about the health of Italian financials.
The Italian banks index lost 1.4 percent, hurt by Moody's reiterating its negative outlook on the sector and by news the Bank of Italy had told domestic lenders to make adequate provisions for rising bad loans.
Analysts have cut their 2013 earnings forecasts for European financials by 3.2 percent in the past 30 days, according to Thomson Reuters Starmine SmartEstimates, making it the third worst performing sector after energy and information technology.
For STOXX 600 as a whole, forecasts have been cut by 2.1 percent, though earnings are still seen up 9.5 percent next year - a figure deemed far too high by top-down strategists
"Earnings are being marked down increasingly aggressively for the moment ... that is a headwind for the market," said Daniel McCormack, strategist at Macquarie.
He forecasts 3 percent earnings growth for European companies next year - less than a third of the rate implied by bottom-up forecasts but, according to him, still stronger than what is factored in by historically low valuations.
"I think 2013 will be a good year as whole, but at the moment the market looks a bit wobbly," McCormack said.