* FTSEurofirst 300 up 0.7 pct
* Financials lead gainers after Fed outlook, Italian auction
* Auto stocks rally, led by Peugeot
LONDON, March 14 (Reuters) - European shares were higher at midday on Wednesday, extending their march towards last summer's highs, on upbeat comments from the U.S. Federal Reserve and a successful auction of Italian bonds.
Financials and other cyclical stocks rallied after the Fed improved its outlook for the United States, the world's largest economy and Europe's biggest export market, and said most U.S. banks had passed stress tests.
Italy, Europe's largest debtor, sold 6 billion euros of bonds at a debt auction on Wednesday, with yields at their lowest since October 2010, suggesting investors were turning more upbeat following Greece's successful debt restructuring deal.
"A little bit of good news goes a long way, and we're seeing it played out in the market at the moment," said Peter Sullivan, HSBC's head of equity strategy for Europe and the U.S.
"It's a classic second-derivative point when earnings and economic momentum start to bottom out: things don't have to get materially better; once they stop getting a lot worse that has an important influence on equities."
So far in the fourth-quarter earnings season, European companies have beaten analysts' estimates by an average 2.1 percent, Thomson Reuters Starmine data shows.
The FTSEurofirst 300 pan-European index of top European shares was 0.7 percent higher at 1,102.42 points, a level not seen since July 26, having traded 48 percent of its 90-day volume average.
It was echoing strong advances on Wall Street, which posted its best day this year on Tuesday.
The euro zone blue-chip Euro Stoxx 50 index rose 1.1 percent to 2,584.11 points, confirming a break-out from the 2,550 points-2,555 points resistance zone.
Charts showed the index had roughly another 60 points to go before encountering the next resistance level at around 2,640 points, which corresponds to the 61.8 percent retracement of last summer's downward move.
German utility E.ON topped the chart, rising 6.8 percent on volume 160 percent the average after saying it expected renewable energy and foreign expansion to lift core profit in 2012-13 and announcing a renegotiated supply deal with Statoil.
Auto stocks also rallied, led by France's PSA Peugeot Citroen, which rose 5.7 percent, having traded nearly double its volume average on optimism that the slump that followed its rights issue announcement might have been overdone.
Banks and insurers were also among the top gainers, with Britain's Legal & General up 4.2 percent after reporting forecast-busting full-year profits and hiking its dividend by more than a third.
"Everybody assumes now that the biggest risks are out of the system, especially for U.S. and Asian banks, and with the European debt crisis improving at the moment, the stress test results are taken as a positive sign," a banking analyst said.
"We had some good news on the capital front with the 4Q results, and we see no reason why this should not be continued into Q1 results."