* FTSEurofirst 300 up 0.3 pct
* Holds around 10 points below 5-1/2 year peak
* Next hits record high on higher sales, special dividend
LONDON, Jan 3 (Reuters) - European stocks edged higher on Friday, bolstered by a rally in retailers, but the major indexes remained capped below recent 5-1/2 year highs as investors locked in profits on a forecast-beating 2013.
Retailers gained 1.1 percent after Britain's Next reported strong Christmas sales, raised its profit forecast and announced a special dividend. Next shares jumped 8.5 percent, hitting an intra-day record high and on track for their biggest one-day jump in five years.
The update reassured investors about the health of the broader sector following a profit warning from rival Debenhams . Peer Marks & Spencer added 4.0 percent.
"We've seen from the odd profit warning that not everybody is doing well. There are plenty of people worried about the sector, the UK consumer and the market," said Peter Botham, chief investment officer at Brown Shipley.
"People were assuming that there was a low rate of growth, but clearly they (Next) have done much better than expectations. For them, every time they report, they seem to beat."
Jordan Hiscott, a senior trader at Gekko Global Markets, said investors had built up short positions on Next after the Debenhams warning and some of those were now being reversed.
Telecom Italia was another top riser, up 5.0 percent following a press report that Spain's Telefonica is working on a joint offer for the Italian phone group's Brazilian unit TIM Brasil.
However, broader sentiment remained cautious. Investors took profits from a forecast-beating 2013 rally and adjusted their positions ahead of the first full week of the new year.
The FTSEurofirst 300 was up 0.3 percent at 1,309.61 points by 1112 GMT, recovering some poise after Thursday's 0.8 percent drop but still below the 5-1/2 year peak of 1,320.50.
The start of the year tends to see investors putting fresh money into equities. This time, there is some caution after a stellar 2013, when the FTSEurofirst 300 added 16 percent and the EuroSTOXX 50 index of euro zone blue chips rose 18 percent to 3,109 - more than 200 points higher than analysts had forecast before the start of last year.
"What we have seen from slightly more longer-term accounts is that they have had a cracking return from 2013 and they have taken some risk off the books," said Hiscott at Gekko.
"They are looking to see which way the market moves in the first few weeks of January before taking new long positions."
Miners were among the worst hit sectors for a second day after more weak data from China, the world's top metals consumer, which showed growth in the Chinese service sector fell to a four-month low in December. The STOXX Europe 600 Basic Resources index fell 0.2 percent.
Activity was relatively subdued, with many market players on holiday until next week. Around mid-session, volumes on the FTSEurofirst 300 were at just 29 percent of their 90-day daily average. In contrast, volumes in Next topped 156 percent.