* FTSEurofirst 300 up 0.2 pct in shortened session
* Euro STOXX 50 rises 0.1 pct
* Half-day on stock markets before New Year holiday
* FTSEurofirst on course for best annual gain since 2009
* FTSEurofirst up 16 pct since start of 2013
* DAX remains favoured European region for many
By Sudip Kar-Gupta
LONDON, Dec 31 (Reuters) - European shares crept up on Tuesday before the New Year break, with pan-European indexes set for their biggest annual gains since 2009 and many investors forecasting more progress next year.
Although the stock market rally still faces risks from factors such as a possible spike in bond yields or a rise in the oil price from civil unrest in the Middle East and Africa, traders expect the gradual recovery in the world economy to continue to support equities in 2014.
Trading volumes were extremely low as many European stock markets including Germany, Italy and Switzerland had already closed for 2013. London markets were set to close at 1230 GMT and Madrid, Paris, Amsterdam, Brussels and Lisbon at 1300 GMT.
The pan-European FTSEurofirst 300 index edged up by 0.2 percent to 1,314.41 points in mid-session trading, while the euro zone’s blue-chip Euro STOXX 50 index rose 0.1 percent to 3,103.69 points.
Both those indexes were set for gains of about 16 percent and 18 percent respectively for 2013, their best year since 2009, after signs of economic recovery coupled with a long run of cheap central bank money fuelled a stock market revival.
The rally in Europe has lagged bigger gains in U.S. and Japanese stock markets in 2013, and some traders and investors felt ongoing divergences between European economies could lead to more relative underperformance next year.
“While we remain bullish on equities overall, regional and sector performance will vary significantly,” said Threadneedle Investments chief investment officer Mark Burgess.
Burgess favoured Japanese equities over European ones, as did HED Capital head Richard Edwards, whose preferred European equity region was Germany’s DAX, which rose 26 percent in 2013 to reach record highs.
“The prospects remain better for Germany than the rest,” said Edwards.
Overall, European shares have rallied as investor worries over the euro zone’s debt crisis abated, and the European Central Bank and the U.S. Federal Reserve injected liquidity into financial markets.
Earlier this month, the Fed announced it would slightly trim its huge monetary stimulus programme, but investors have taken heart from stronger U.S. economic data and a commitment from the Fed to keep interest rates low for longer.
Yet while the DAX has hit record highs, other European equity indexes remain a long way from peaks hit in 2007, reflecting how Germany’s economic recovery has been stronger than that of its European neighbours.
France’s CAC equity index still needs to rally about 44 percent to reach highs hit in 2007, before the start of the global financial crisis, while Spain’s IBEX must gain 62 percent and Italy’s FTSE MIB 134 percent.
“Gains have been pretty solid in 2013, but compared with Wall Street which is trading at record highs, Europe still has a nice catch-up rally just to go back to 2007 levels,” said a Paris-based equity and exchange-traded fund (ETF) trader.