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European shares consolidate 5-yr high before Fed decision

By Francesco Canepa

LONDON (Reuters) - European shares hovered near five-year highs on Wednesday, staying within their weekly range as investors held fire expecting the U.S. Fed to announce a first cut to its equity-friendly stimulus program.

The pan-European FTSEurofirst 300 <.FTEU3> closed up 0.5 percent at 1,258.43 points, led by tech stocks <.SX8P> as traders speculated about a possible bid for chip maker ARM Holdings and handset firm Nokia was boosted by a broker upgrade.

The FTSEurofirst was hovering a touch below a five-year high of 1,262.25 points hit on Monday and well within its 1 percent range for the week.

Investors were reluctant to make large directional bets on indexes before a Federal Reserve announcement scheduled for 1800 GMT. Expectations center on a $10 billion cut to its $85 billion monthly asset purchases, which have helped the FTSEurofirst rise around 15 percent in the past year.

With a small reduction to the program now seen as priced in, any indication about the pace of future cuts was likely to set the market's tone for the coming months.

"If you make it too data-dependent you ... are just fuelling volatility (in asset prices)," William de Vijlder, chief investment officer for strategy and partners at BNP-Paribas Investment Partners, said.

"If you set a timeframe ... to roll back the program so that it stops at a certain date, the market would price that instantaneously and you would not create any volatility."

De Vijlder saw equities as being in a sweet spot at a time when the global economy showed signs of recovery and a gradual reduction in the Fed's purchases hurts demand for bonds.

Equity investors remained calm in the run-up to the Fed's announcement, with the Euro STOXX 50 volatility index <.V2TX>, which measures the cost of insuring against future swings in euro zone blue-chip stocks, down 4.3 percent and close to a recent one-month low.

In a further sign of investors' sanguine view on shares, demand for put options on the Euro STOXX 50 <.STOXX50E>, used by managers to protect their portfolios against potential falls, has been fading before September derivative contracts expire on Friday.

Atif Latif, director at Guardian Stockbrokers, said only a cut to stimulus of $15 billion or more would be negative for the market in the short term.

Among specific stocks, Finland's Nokia , was the top riser, up 4.1 percent, after Credit Suisse upgraded the firm to "outperform" from "neutral" in light of its recently agreed merger with Microsoft .

British chip-maker Arm rose 3.2 percent as traders rehashed talk of a bid for the firm, although there was no firm detail on the suitor. The broader STOXX Europe 600 Technology index rose 1.2 percent to highs not seen since early 2008.

(Additional reporting by David Brett; Editing by Ruth Pitchford)

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