* FTSEurofirst 300 up 0.5 pct, Euro STOXX 50 up 0.6 pct
* Worries over Cyprus bail-out seen capping gains
* Many investors expect Q2 equity market pull-back
* D.E. Master Blenders surges on bid talks
By Sudip Kar-Gupta
LONDON, March 28 (Reuters) - European shares rose on Thursday, buoyed by investors who covered bets against the market after Cyriot banks reopened as scheduled and by a surge in coffee and tea group D.E. Master Blenders on bid talks.
The pan-European FTSEurofirst 300 index rose 0.5 percent to 1,189.51 points by midday, recovering from a three-week low in the previous session, while the euro zone's blue-chip Euro STOXX 50 index rose 0.6 percent to 2,627.30 points.
Anxiety over Cyprus, whose 10 billion euro ($12.8 billion)bailout package has forced it to tax wealthy bank depositors, has put a brake on a rally on equity markets since the start of 2013.
Some uncertainty over the Cypriot situation was removed on Thursday when the country's banks re-opened for business without being besieged, although concerns remain about a possible run on deposits.
Richard Edwards, who heads trading and research firm HED Capital, said investors were unwinding "short" positions that had been betting on a stock market fall.
"There's an element of 'sell on the rumour, buy on the news'. When a disaster is expected and then it finally occurs, you cover your short positions," he said.
The problems in Cyprus have reignited concerns about how unified the euro currency bloc can remain, with southern states such as Greece, Cyprus, Spain and Italy hit hardest by the region's sovereign debt crisis, while northern European countries such as France and Germany fare better.
Edwards favoured Germany's DAX index over Spanish and Italian equities. The DAX has risen some 3 percent since the start of 2013, while Spain's IBEX has fallen 3 percent and Italy's FTSE MIB has declined by 5 percent.
"I would sell any rallies on Spain and Italy and buy any dip in Germany," he said.
D.E. Master Blenders leapt 27.5 percent to add the most points to the FTSEurofirst 300 after it received a 7.6 billion euro bid approach from its biggest shareholder, Joh A. Benckiser.
"We would envisage a very high chance of a transaction here," Olive Tree Financial Group analysts wrote in a note.
Despite the weak economic backdrop caused by the euro zone's debt crisis, equity markets have been supported by expectations of more merger activity, and by pledges of liquidity support from the European Central Bank.
A Reuters poll this month showed the Euro STOXX 50 seen rising to 2,935 points by the end of 2013, while the broader STOXX Europe 600 index, which was up 0.4 percent at 293.74 points, was seen ending the year at 317 points.
However, many expect the market to drop back in the second quarter as investors use worries over Cyprus and political stalemate in Italy to sell shares in order to book profits on the first quarter's equity rally.
"The Cyprus situation is an enormous howler by the European Union. I think the market will be sideways to down in the second quarter. We could see a five to 10 percent pullback," said Toby Campbell-Gray, head of trading at Tavira Securities.