* FTSEurofirst 300 up 0.4 pct
* Demand at ECB's second funding operation higher than forecast
* Strategists see further upside for market
By Brian Gorman
LONDON, Feb 29 (Reuters) - European shares were higher on Wednesday after the ECB provided 530 billion euros ($711 billion) of cheap funding for banks, reinforcing investors' optimism that more credit will flow to businesses and government borrowing costs will ease further.
The European Central Bank's Long Term Refinancing Operation (LTRO) has been a major factor behind the rally in European equities since the turn of the year.
A total of 800 banks borrowed money at the tender, the second round of three-year funds, with demand exceeding the 500 billion euros expected by traders polled by Reuters.
"The markets are interpreting this positively, focusing on the liquidity aspect. The initial reaction will be to push up the banks and other associated high-beta sectors," said James Buckley, a London-based fund manager at Baring Asset Management which has 30 billion pounds ($47.5 billion) under management.
"Near-term fears about capital adequacy have receded. We're seeing a continued downward trend in peripheral European bond markets."
At 1204 GMT, the FTSEurofirst 300 index of top European shares was up 0.4 percent at 1,080.61 points, taking its gains for 2012 to 7.9 percent.
Euro zone banks were among the gainers, up 1.2 percent, extending the sector's gain this year beyond 14 percent.
Miners also rose, as copper prices hit two-week highs. The STOXX Europe 600 Basic Resources Index was up 0.7 percent.
Buckley said that, over the next few months, European shares could regain the highs of 2011, about 10 percent up from current levels.
He said cyclical stocks would continue to outperform, and he was maintaining a preference for selected industrials and banks. He added that in the short term people might "park some money" in sectors such as telecoms and utilities, which have underperformed in 2012.
Strong consumer confidence and labour data from the United States, the world's biggest economy, has helped to keep investors optimistic about the prospects for European equities, even as the euro zone debt crisis has taken its toll.
On Tuesday, the Dow Jones finished above 13,000 for the first time since before the financial crisis of 2008.
The rally in European stocks has propelled valuations to levels not seen for almost 10 months.
The STOXX Europe 600 carries a forward price-earnings ratio of 10.8, according to Thomson Reuters Datastream, though this is cheaper than Wall Street's S&P 500 -- trading at 12.7 times forward earnings -- while the MSCI emerging equities index trades at 10.3 times.
"The change in monetary policy by the ECB and its two funding operations have taken away the tail risk," said Joost van Leenders, strategist at BNP Paribas Investment Partners.
European fund managers increased their equity holdings in February to a seven-month high, cutting bonds and cash, a Reuters poll showed.