* FTSEurofirst index up 1.1 percent * EU crisis measures support sentiment, all eyes on ECB * Risks remains, as shown by weak Chinese data By Toni Vorobyova LONDON, July 2 (Reuters) - European equities scaled two-month highs on Monday, drawing support from policy measures to battle the euro zone crisis and expectations of more to come, but weak Chinese data kept a lid on gains. Factory activity in China's private sector shrank at its fastest pace in seven months in June, data showed on Monday, dampening prospects for European companies which are increasingly looking abroad for earnings growth as the region's domestic economy stumbles. The silver lining for equities is that weak data could galvanise policymakers into action to stimulate the economy. The European Central Bank widely seen cutting interest rates at this week's meeting. With European leaders unexpectedly agreeing on bold initiatives at the end of last week, including allowing the euro zone's ESM bailout fund to inject money directly into stricken banks, that could provide enough of a boost to turn some investors more upbeat on the region's unloved stock markets. "I would not say it's a real game changer but it gives the market some breathing space over the next couple of weeks," Gerhard Schwarz, equity strategist at Baader Bank, adding that bearish positioning left the market open to further gains, though with caveats. "The data out of Asia certainly is still showing that, in particular in China, sentiment is deteriorating ...It is an environment where only the flexible investors are able to make money, so a lot of long only investors will be sitting on the sidelines." The FTSEurofirst 300 was up 1.1 percent at 1,032.22 points by 0829 GMT. The pan-European index surged 2.6 percent on Friday in its biggest daily gain in seven months on the back of the policy moves agreed at the European summit. The Euro STOXX 50 index added 1.5 percent, touching its highest levels since early May and reversing an earlier retreat after finding strong technical support around the 38.2 percent Fibonacci retracement of its mid-March to late-May downward move. 'BABY STEPS' In light of the summit measures, investment house Jefferies recommended longs on the index alongside the sale of safe-haven German Bunds. "While the final EU communique was short on details and implementation, the equity markets ought to feel reasonably assured that the vicious cycle between sovereign credit rating downgrades and bank solvency has finally been broken," Jefferies' strategists said in a note. "It only leaves ECB President Mario Draghi to cut interest rates on 5th July for European equity investors to believe that they have been underwritten." The sentiment ratio as calculated by Paris research firm 2Bremans showed a slim majority of 52 percent of investors have a positive stance on the market. "The fundamental backdrop for financial assets is poor, but in the short term policymakers are attempting to prop up markets via central bank action and baby steps on the road to solving the European crisis," Stewart Richardson, Chief Investment Officer at RMG Wealth, said in a note. The 'baby steps' cheered the banks, which have direct exposure to the region's debt crisis through their sovereign bond holdings. The sector added 0.5 percent. Credit Agricole was the biggest gainer on the FTSEurofirst 300, up 3.9 percent with the broad sentiment lift bolstered by a Financial Times report that the French bank is in talks to sell its Greek affiliate Emporiki Bank and has received interest from three local lenders. Credit Agricole declined to comment.