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European equity rally gathers pace on record inflows

* FTSEurofirst 300 gains 0.5 pct, up 5.3 pct in 2 weeks

* Europe stocks see record $17 bln in inflows year-to-date

* Italian shares up as Renzi set to form government

PARIS, Feb 17 (Reuters) - European shares climbed to a three-week high in thin volumes on Monday, extending a strong two-week rally fuelled by record inflows from an increasing number of investors betting on the region's economic recovery.

Easing worries over emerging markets as well as data showing brisk lending in China boosted shares in miners, with BHP Billiton up 1.2 percent and Glencore Xstrata up 1.7 percent.

The FTSEurofirst 300 of top European shares was up 0.5 percent at 1,338.37 points, the highest since late January. However, volumes on the index, which has gained in eight of the past nine sessions, were just 45 percent of its 90-day daily average due to a holiday in the United States.

Data from EPFR Global showed European equity funds have enjoyed net inflows of $17 billion since the beginning of 2014, marking a record start to the year and in sharp contrast to massive outflows from emerging market funds.

"One of the most popular pairs trade at the moment is being 'long' on shares that have no exposure to emerging markets and 'short' on shares that have a strong exposure to them. This has worked really well in January and it could continue," said Nicolas Rousselet, head of hedge funds and managing director at Unigestion, in Geneva.

EPFR said that within Europe, equity funds focused on Italy and Spain have been leading the way in terms of inflows. Both countries have recently seen their bond yields retreat sharply.

Italian 10-year government bond yields hit an eight-year low on Monday, after ratings agency Moody's lifted its outlook on the country's credit rating to 'stable' from 'negative' and as Rome prepared for a new government.

"Investors are quite sanguine about the economic and political situation in peripheral Europe, and that's a very positive signal," said David Thebault, head of quantitative sales trading at Global Equities in Paris. "Ten-year bond yields continue to fall across the board, a sign of stability which has prompted a lot of investors to come back."

Italy's FTSE MIB was up 0.3 percent after outperforming the wider market on Friday, rallying 1.6 percent, as investors welcomed the prospect centre-left leader Matteo Renzi will become prime minister.

The MIB is up nearly 8 percent so far this year, trading at a 2-1/2 year high and strongly outperforming a 1.6 percent rise in the FTSEurofirst 300 in 2014.

COMPANIES

European shares have been supported by relatively good corporate results in the current earnings season, with 58 percent of companies reporting in-line or better-than-expected profits, according to Thomson Reuters Starmine.

While in absolute terms net profits are still falling, a pick-up in corporate revenue, up 2.3 percent overall, and a slight improvement in economic growth in the euro zone is fuelling investors' hopes that earnings will pick up this year.

Bucking the trend on Monday, shares in Neste Oil dropped 4.9 percent after Nordea lowered its rating to "hold" from "buy," citing uncertainty over U.S. policies on biodiesel, including volume targets and tax credits.

Europe bourses in 2014:

Asset performance in 2014:

Today's European research round-up