European shares at new highs on U.S., German hopes
* FTSEurofirst 300 up 0.4 percent
* Banks gain; UBS firm despite Libor probe fine
* Merck big faller on Stimuvax setback
LONDON, Dec 19 (Reuters) - European shares scaled fresh 18-month highs on Wednesday, boosted by banks, as expectations built that a budget deal will be reached in Washington.
The FTSEurofirst 300 was 0.4 percent firmer at 1,142.49 by 1224 GMT, trading at levels not seen since June 2011, with a slightly better German business climate index for December further helping sentiment.
Economically-sensitive banks were among the best off, with the sector under the spotlight after UBS agreed to a $1.5 billion fine in order to settle charges of manipulating the Libor interbank lending rate.
The penalty, the second-largest fine paid by a bank, was in line with expectations, and shares in UBS rose 1.3 percent to levels not seen in 17 months following the news which traders said removed a major uncertainty.
"Investors see this as paving the way for a brighter future - the effects of the settlement have clearly been factored in already," Mike McCudden, head of derivatives at Interactive Investor, said.
Volume in UBS stood at 70 percent of the 90-day daily average, against that for the FTSEurofirst 300 at 48 percent.
Traders said financial stocks also received a fillip from a sector upgrade to "overweight" by Credit Suisse in its Global Equity Strategy 2013 outlook.
In an otherwise quiet day in terms of corporate newsflow, Merck KGaA was among the top FTSEurofirst 300 fallers, off 3.2 percent, after the company said its cancer vaccine Stimuvax failed to meet a goal of improving survival in lung cancer patients.
The optimism brewing over signs of progress in heading off a "fiscal cliff" of growth-curbing austerity measures alongside expectations for more monetary stimulus from the Bank of Japan took world stock markets to 17-month highs on Wednesday.
A budget deal could give further impetus to a Christmas rally in equity markets that has become something of a tradition, with the FTSEurofirst 300 having notched up a monthly gain in December 12 times in the last 15 years.
"Generally the biggest impact at this time is seasonal so excess cash tends to be put into the market for the year end," Lucy MacDonald, CIO Global Equities at Allianz Global Investors, which manages around 300 billion euros ($400 billion).
"On balance... you would expect the market to carry on going up towards the end of the year."
The euro zone's blue-chip Euro STOXX 50 was up 0.5 percent at 2,657.48, its highest level since August 2011.
Barclays Capital technical analyst Lynnden Branigan, encouraged by the Euro STOXX 50's close on Tuesday above the top of a range seen over the past week, targets 2,709 - the intra-day peak hit on Aug. 1 2011 just prior to a market downturn - in the run-up to year-end.