* FTSEurofirst 300 index flat
* Index up 12.9 pct year to date, biggest gain since 2009
* Impasse in U.S. budget talks dents sentiment
* Volume thin, several markets shut for New Year holiday
By Francesco Canepa
LONDON, Dec 31 European stocks were set to rack up their best yearly gain since 2009 on Monday but the outlook was worsening due to the risk of a politically induced recession in the United States which would dent global growth.
The pan-European FTSEurofirst 300 index, up 12.9 percent year to date, was flat at 1,130.27 points at 0857 GMT as an impasse in U.S. budget talks pushed the world's biggest economy to the edge of the "fiscal cliff" of austerity measures due to kick in in the new year.
While hope has largely evaporated for any sort of broad deal on Monday, the lack of panic on markets reflects expectations that officials will find a solution early in the New Year. U.S. stock futures, notably, were up.
But if unfettered, the scheduled tightening measures would likely send the U.S. economy into contraction and a failure to find any common ground on Monday would add to market nerves that a solution may be some way off.
"Given that there's an increased likelihood that we're not going to get a deal, the fiscal cliff is going to be a big issue and the longer it lingers, the more it's going to unnerve investors," Ishaq Siddiqi, a market strategist at ETX Capital, said.
Siddiqi added a failure of talks on Monday may push Britain's FTSE 100, down 0.3 percent at 5,905.08 points, back to a late November low of 5,800 in the coming sessions.
"Volumes are very depressed and we're going to see a lot of cash off the table and investors are probably going to take profit on cyclical shares," he said.
Trading was muted as a number of European stocks exchanges such as the French, Dutch, Spanish and UK markets will only trade for half the session on Monday, while those in Germany, Italy, Austria, Denmark, Norway, Sweden and Switzerland will be closed.
Charts on the FTSE also pointed to likely downside after the index failed to break above 6,000, a level that has capped the index since mid-2011.
"The downside momentum could be strong below the 5900 level, and might retest 5885-80 area," Guardian Stockbrokers said in a note.
"Below 5880, the sentiment would be clearly shifted to the downside on the daily charts."
The FTSE's 14-day Relative Strength Index, a momentum indicator, was also falling after testing its September and November resistance at 65.9 earlier this month.
The FTSE was still poised to end the year with a 6 percent gain.
But that pales in comparison to a 13.4 percent gain for euro zone blue chips in the Euro STOXX 50 which is thanks largely to the European Central Bank's action to stem the region's debt crisis.
The euro zone index has rallied some 22 percent since late July when the ECB pledged to do all that was necessary to defend the euro project. Implied volatility on euro zone shares, a gauge of investor fears of future share price swings, fell to lows not seen since 2007 earlier this month.
The Euro STOXX 50 Volatility Index, or VSTOXX, which measures the cost of options on euro zone blue chips, hit a 5-year low in mid-December before staging a rebound last week as the impasse in U.S. budget talks prompted investor to buy protection.
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