European shares hold firm, but off peaks
* FTSEurofirst 300 up 0.3 pct
* Technicals point to risk of more downside
* Telecom Italia up as Telefonica agrees to raise stake
LONDON, Sept 24 (Reuters) - European shares held firm in early trade on Tuesday, bolstered by signs of merger and acquisition activity in the telecoms sector but kept below recent 5-year highs by concerns about U.S. fiscal and monetary policy.
Telecom Italia jumped as much as 4.8 percent after Telefonica agreed to raise its stake.
"There is a general feeling of more deal activity, I am still fairly bullish (on equities). If there is decent M&A activity and the underlying economy is improving a bit ... then it's all adding to the overall picture of optimism," said Neil Marsh, strategist at Newedge.
"But I think there is still a lot of caution around."
Such caution kept a lid on the broader market, limiting gains on the FTSurofirst 300 to 0.3 percent, at 1259.34 points, with the pan-European index lacking the momentum to re-test last week's 5-year peaks at 1,274.59.
Expectations of reduced stimulus in the United States - which were dented by the Federal Reserve's surprise decision to leave policy unchanged at last week's meeting - were reignited by New York Fed President William Dudley on Monday.
The influential official said the U.S. central bank still aims to scale back the pace of its asset purchases later this year as long as the economy keeps improving.
Continued political discord over the U.S. budget also kept markets on edge, raising the prospect of a federal government shutdown if a deal is not struck by month-end.
The EuroSTOXX 50 gauge of euro zone blue chips was 0.4 percent higher at 2,916.99 points having erased the remainder of its post Fed meeting rally the previous session.
"Statistics suggest a decent probability for a short-term extension to the downside. Today could potentially be the day for a series of bearish price flips, i.e. a close below the close four price bars earlier," Jean-Charles Gand, senior market strategist at BBSP Research said in a note.
(Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)