* European shares hit 7-yr high, bond yields new lows
* Europe gears up for ECB, Greek election
* Chinese shares plunge 7.7 percent
By Jamie McGeever
LONDON, Jan 19 (Reuters) - European stocks and bonds rose on Monday as investors shrugged off the steepest fall in Chinese shares for over six years and bet the European Central Bank will unveil a bond-buying economic stimulus package later this week.
Anticipation the ECB will announce such quantitative easing, or QE, at its Thursday policy meeting also eclipsed uncertainty surrounding Sunday’s Greek election, which anti-bailout party Syriza looks set to win without a controlling majority.
Some euro zone government bond yields hit new lows and German stocks reached a new high. Market liquidity was lighter than usual owing to the Martin Luther King Day U.S. holiday.
While European investors were in a relatively bullish mood on Monday, Greece and China remained risks and the dust continued to settle from the Swiss National Bank’s shock decision last week to scrap the franc’s exchange rate cap.
“Quantitative easing is in the pipeline,” said Jean-Louis Cussac, head of the Paris-based Perceval Finance.
“There’s a positive bias on the market overall ahead of the ECB meeting, but the market is very volatile and there are big question marks on the upside potential going forward.”
Germany’s DAX was up 0.4 percent, having hit a new high of 10,253 points earlier in the day. Britain’s FTSE 100 index was up 0.2 percent at 6,561 points, while France’s CAC 40 was 0.3 percent higher at 4,393 points.
The FTSEurofirst index of 300 leading European shares hit a seven-year high of 1,413 points. Shares in Julius Baer were among the top gainers, up 5 percent, after the Zurich-based private bank said it did not suffer any losses from the SNB’s decision to ditch the franc cap.
Spain’s 10-year government bond yield hit a new low of 1.47 percent and Italy’s benchmark yield fell as low as 1.62 percent ahead of the ECB’s expected QE move.
The euro recovered some ground after hitting an 11-year low last week, and was up 0.3 percent from Friday’s New York close at $1.16.
The common currency jumped 2 percent against the Swiss franc to 1.01 francs, after tumbling 17 percent last week when the SNB abandoned its cap on the franc.
In China, financial shares were hammered as Beijing cracked down on credit products that have been blamed for fuelling excessive market speculation over the past three months.
The Shanghai market and the CSI300 index of the largest listed companies in Shanghai and Shenzhen both plunged 7.7 percent, their biggest falls since June 2008.
Adding to the air of caution was Sunday data showing Chinese new home prices in December fell an average 4.3 percent year-on-year in 68 of the 70 major cities monitored.
That was just an appetiser for Tuesday’s report on gross domestic product, which is expected to show China’s annual growth slowed to 7.2 percent in the last quarter. That would mean full-year growth undershot Beijing’s 7.5 percent target and was the weakest in 24 years.
MSCI’s broadest index of Asia-Pacific shares outside Japan erased early gains to close 0.3 percent lower, even as markets across much of the region edged higher.
China-led nervousness in Asia boosted the Japanese yen. The dollar was down a third of one percent at 117.20 yen, and the 10-year Japanese government bond yield hit a new record low of 0.2 percent.
But the main event of the week will be Thursday’s ECB meeting. Sources have told Reuters the ECB may adopt a hybrid approach -- buying debt and sharing some of the risk across the euro zone while national central banks make separate purchases of their own.
There has also been talk the programme will be limited in size to 500 billion euros, an amount that would disappoint investors eager for bold measures to spur growth and inflation. Sunday’s Greek vote also complicates the picture.
“With a Greek election only three days after the ECB decision, the likelihood of any bond buying programme including Greece remains highly unlikely given the prospect of a Syriza victory,” CMC Markets chief markets analyst Michael Hewson said.
Oil prices were weak, with Brent and WTI crude futures both down 0.8 percent, to $49.79 and $48.23 a barrel respectively.
To read Reuters Global Investing Blog click here for the MacroScope Blog click on blogs.reuters.com/macroscope for Hedge Fund Blog Hub click on blogs.reuters.com/hedgehub (Reporting by Jamie McGeever; Additional reporting by Blaise Robinson in Paris; Editing by Catherine Evans)