European shares rally on German growth hopes

* Euro STOXX 50 up 0.7 pct, FTSEurofirst 300 up 0.2 pct * Strong Ifo survey boosts growth expectations * Germany's DAX hits 5-year high * Euro zone banks rally on ECB loan repayment plans * Nokia down 5.4 pct on cash concerns By Francesco Canepa LONDON, Jan 25 (Reuters) - European shares rallied on Friday as strong economic data out of Germany boosted expectations Europe's largest economy can help drag the region out of crisis. A surprisingly strong Ifo business climate index for January built on a run of solid German data, including the purchasing manager index on Thursday. It helped Frankfurt's Dax index rise 1.1 percent to a five-year high while, by 1204 GMT, the euro zone's Euro STOXX 50 index stood up 0.7 percent at 2,740.93. The Euro STOXX 50 has risen 27.7 percent since late July, boosted by a pledge by the European Central Bank to help the region's weaker economies, outpacing a 12.3 percent rise for the U.S S&P 500 index. "The strong momentum in euro zone activity is supportive of further (equity market) outperformance of Europe versus the U.S.," said Emmanuel Cau, a strategist at JPMorgan, while adding he thought the bulk of the rally in Europe was over. In a further signal of growing appetite for European equities, the Euro STOXX 50 Volatility Index, the region's widely-used measure of investor risk aversion, hit a near six-year low on Friday. Charts on the Euro STOXX 50 confirmed a bullish short-term outlook as long as the index remained above 2,692 - a low hit on Thursday that also roughly corresponded to the index's rising 20-day simple moving average. "As long as 2,692 is support, a test of the resistance level at 2,790 remains the most likely scenario," Nicolas Suiffet, a an analyst at Paris-based Trading Central said, setting his target at the 'neckline' of a chartist pattern known as a double top, validated in May 2011. "Alternatively, a break below 2,692 would not invalidate the short-term bullish trend but would open the way to a correction move towards 2,600 (a recent strong resistance) and 2,546 (the low end of a gap opened in November." CONSOLIDATION JPMorgan's Cau argued the bulk of the European rally was over, with the pan-European MSCI Europe index trading at 11.8 times its earnings for the next 12 months, only 2 percent away from its median of the last 10 years. Earnings momentum remained negative and U.S. data started to disappoint, as shown by the Citigroup U.S. Economic Surprise indicator turning negative this week. "On most occasions when (the indicator) turned negative, cyclical (stocks) underperformed defensives over the following few months," Cau said. He still saw value in financial shares, which benefit from the financial stability brought by ECB's pledge, and said there was scope for a further 10 percent rally in European banks if their share prices matched the recent fall in their bond yields and other debt instruments. The positive effect of the ECB's moves were visible on Friday as euro zone banks said they will repay 137 billion euros worth of cheap ECB loans next week, opting to hand back the money early in a sign at least parts of the financial system are returning to health. The figure was higher than expected and helped the Euro STOXX banking index extend gains to around 1 percent. The FTSEurofirst 300 index of pan-European shares was up 0.2 percent at 1,173.53 points, having trimmed gains after data showed a bigger than expected contraction in the British economy. Curbing gains on the index was Finnish handset maker Nokia , which fell sharply for the second day in a row, with traders citing the impact of a UBS price target cut on the stock and ongoing concerns over Nokia's cash position. Also weighing on the handset maker are outlook comments from market leader Samsung Electronics, which said it expects the global smartphone market to shrink in the first quarter from the seasonally strong fourth quarter.