(Fixes index volume level in penultimate paragraph)
* FTSEurofirst 300 up 1.2 percent
* Ifo sees biggest rise since July 2010
* Volkswagen drops, cautions on 2013 outlook
By Tricia Wright
LONDON, Feb 22 European shares rose on Friday in a broad-based rally as investors took advantage of the previous session's steep falls to pick up equities more cheaply, though traders cited some caution given weekend elections in Italy.
The FTSEurofirst 300 closed up 1.2 percent at 1,165.58, having sunk 1.5 percent on Thursday as uncertainty over the U.S. Federal Reserve's future monetary policy was compounded by disappointing news on the euro zone economy.
Brightening the mood on Friday, data showed German business morale surged at its fastest pace in over two years in February.
The Euro STOXX 50 Volatility Index, or VSTOXX, Europe's widely-used measure of investor risk aversion, retreated from three-month highs hit in the previous session.
"People are looking more relaxed today with the Ifo showing that at least for the German economy things are moving into the right direction," Gerhard Schwarz, strategist at Baader Bank, said.
"I think we are now in a kind of digestion phase going on for a couple of weeks, and after that I would expect a resumption of the uptrend."
Investors in Europe have been seeking protection against the risk that Italian elections next week could produce a political stalemate that will make fiscal reforms more difficult to implement.
The euro zone's blue-chip Euro STOXX 50 index firmed 2 percent to 2,630.05, bouncing back off a 2.3 percent drop on Thursday which took it to a fresh 2013 closing low of 2,579.76.
Technical charts painted a gloomy picture. Lynnden Branigan, technical analyst at Barclays Capital, cautioned that until the index closed above 2,670, around the 50-day moving average and recent range high, there is a risk of further weakness.
"Closing below 2,579 would signal a third leg lower off the Jan highs... Initial supports below 2,579 are at 2,567 and then 2,522," he said.
Among significant movers on Friday, Europe's biggest carmaker Volkswagen shed almost 7 percent to top the FTSEurofirst 300 fallers' list after it became more cautious on its business outlook against a backdrop of declining European auto markets.
Trading volume in the stock was robust, at more than four times its 90-day daily average, against the FTSEurofirst 300 on 102 percent of its 90-day daily average.
In the current reporting season, 45 percent of STOXX Europe 600 firms have posted results so far, of which 61 percent have beaten or met forecasts, according to Thomson Reuters Starmine data.
(Reporting by Tricia Wright; editing by Ron Askew)