* FTSEurofirst 300 flat
* Strong Spanish bond auction helps sentiment
* Tesco shares trump M&S after trading updates
By Tricia Wright
LONDON, Jan 10 (Reuters) - A leading European share index traded flat on Thursday, holding near two-year highs, after Spain saw good demand at an auction of government debt and following further evidence of improving economic conditions in China.
Uncertainty ahead of central bank policy decisions hampered the index, with meetings later in the session of the European Central Bank and the Bank of England under the spotlight.
However, the economic picture is not seen as weak enough to prompt fresh stimulus measures from either, with both widely seen announcing unchanged policy.
The FTSEurofirst 300 was trading at 1,167.88 by 1150 GMT, having advanced 0.7 percent on Wednesday.
The index has risen around 3 percent since the start of the year, mirroring gains globally as investors welcomed a U.S. budget deal to avoid a fiscal crunch that had threatened growth in the world's largest economy.
"The year's got off to quite a good start. There's still risk appetite out there and that's just helping prop up the market," Angus Campbell, head of market analysis at Capital Spreads, said.
"I think if there is a dip then that could present a good buying opportunity because the uptrend still remains intact, so if we do retrace a little, it may not go very far."
Banks were in demand, ahead 0.6 percent, drawing continued strength from the recent decision by global regulators to water down their liquidity requirements.
Traders cited a strong Spanish bond auction as supportive to market sentiment, with the country's Treasury having sold 5.8 billion euros of bonds, well above its target range of 4 billion to 5 billion euros.
Some gains were seen among mining stocks after better-than-expected trade data from China, the world's top metals consumer.
Iron ore imports in China hit a record high in December, while China's total exports rose faster than expected, indicating some pick-up in global demand, although the figures remained weak historically.
"Great data out of China overnight ... If China has indeed bottomed we can see much higher stock prices in the months ahead," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages around $500 million of assets.
Retailers presented a mixed picture. Investors were buying up Tesco shares while selling its rival Marks & Spencer on contrasting Christmas sales performances, after M&S's decision to offer fewer discounts failed to reap rewards.
Marks & Spencer was among the top FTSEurofirst 300 fallers, off 4.2 percent, after saying sales of clothing, footwear and homewares slumped 3.8 percent in the 13 weeks to Dec. 29 at UK stores open more than a year.
In response, Espirito Santo cut its 2013 and 2014 profit forecasts for the high street retailer by up to 7 percent.
The reaction to the M&S update was in stark contrast to that of Tesco. Its shares rose 2.4 percent as it posted the highest sales growth in three years over the highly competitive Christmas period, a year after its profit warning and showing that a turnaround plan was starting to work.
Consumer electronics firm Philips was up 3 percent, the second-biggest FTSEurofirst300 gainer, after BofA Merrill Lynch upgraded its rating to "buy".
Dutch brewer Heineken was a big faller, down 3 percent, as the same bank cut its rating for the stock to "underperform".
Negative broker comment also weighed on Germany's Fresenius Medical, off 2.6 percent as Credit Suisse downgraded its rating to "neutral".