Strong U.S. data helps European stocks to recover

* FTSEurofirst 300 index closes flat near highs

* Italy's FTSE MIB falls 1.7 pct on weak bond auction

* Euro STOXX 50 index could test 2,885 in 2 weeks

LONDON, March 13 (Reuters) - European shares recouped their earlier losses to end flat near 4-1/2-year highs on Wednesday, with sentiment improving after robust U.S. retail sales data pointed to a continued recovery in the world's biggest economy.

However, Italy's FTSE MIB index, down 1.7 percent to 15,745.34 points, underperformed the market following weaker demand at its first bond auction since Fitch cut the country's credit rating.

Analysts said the broader stock market was poised to resume its recent rally in the coming days as the improving economic outlook could prompt more investors to put their money in equities at the expense of other asset classes.

The FTSEurofirst 300 index of top European shares ended flat at 1,194.11 points, after hitting an intra-day low of 1,188.98. It recovered after data showed U.S. retail sales rose more than expected in February, the largest increase since September.

"The underlying sentiment is pretty bullish. People are neglecting several uncertainties and focusing on growth as hopes for a recovery in the global economy have improved. Equities are a better alternative to invest in in the current environment," Christian Stocker, strategist at UniCredit in Munich, said.

"In the next two to four weeks, the DAX could set a new high above 8,200," he said, referring to Germany's benchmark index , which rose 0.1 percent to 7,970.91 points.

The euro zone's blue chip Euro STOXX 50 index fell 0.3 percent to 2,704.73 percent. However, charts suggested the index could resume its uptrend.

"The index is consolidating after last week's rally but the downside potential is very limited," Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.

"This short-term consolidation will take place above its 50-day moving average of 2,675 and a horizontal support of 2,666, from where the recent rally should resume."

The index could test the strong horizontal resistance at 2,885 on the weekly chart in a couple of weeks, he said.

ITALY UNDER PRESSURE

At a time when several European stock indexes are hovering near their multi-year highs, Italy's FTSE MIB index has been strongly underperforming, down about 12 percent since late January as the country's political crisis has spooked investors.

Charts showed the index was stuck in a six-week downward channel, testing a key support level at 15,812 points, representing the 38.2-percent Fibonacci retracement of the index's sharp rally sparked last July by European Central Bank President Mario Draghi's commitment to safeguard the euro.

Although, overall outlook for the European stock market remained positive, the situation in Italy and slow growth in Europe prompted some analysts to advise caution in investing further money in equities in the near term.

Ion-Marc Valahu, fund manager at CLAIRINVEST in Geneva, said European markets still faced several challenges such as the Italian situation, too much austerity and overbought trading conditions. Valahu said he would prefer to see some of the issues resolved before committing more capital to the markets.

"I am bullish going forward, but the market should take a breather so that the economic and earnings numbers can catch-up. The U.S. data is coming in better than expected so far, but the equities in the U.S. and Europe look overstretched."

On a sector level, banks were among the top decliners, led lower by Commerzbank, which fell 9.7 percent on news that the German government will cut its stake in the bailed-out lender to less than 20 percent from 25 percent.

Although investors were gradually placing more bets on cyclical stocks, some analysts chose to stay defensive for some more time.

"My preferred sectors in Europe are stable growth stocks like food and beverages, personal and household goods and healthcare," Stocker of UniCredit said.

Defensive sectors outperformed on Wednesday, with food and beverages shares rising 0.2 percent and the personal and household goods sector gaining 0.1 percent.

Among individual movers, Prudential climbed 9.3 percent after its chief executive said a strong profit and share price performance had made it unlikely Britain's biggest insurer would pursue mooted disposals next year.