* FTSEurofirst 300 up 0.3 percent
* Miners higher, Glencore sticks with Xstrata bid
By David Brett
LONDON, Aug 21 (Reuters) - European shares clawed back the previous session's losses by midday on Tuesday, with miners and banks leading the rebound as investors continued to speculate on the prospect of the European Central Bank stepping strongly into bond markets.
By 1032 GMT, the FTSEurofirst 300 .FTEU3 was up 3.79 points, or 0.3 percent, at 1,108.65, having closed 0.5 percent lower on Monday, after a lack of firm news and low volumes caused the market to pause at the top of its August trading range.
Conjecture is continuing as to whether the ECB was preparing to cap the borrowing costs of troubled sovereign borrowers.
Traders cited an article in London's Daily Telegraph again raising the prospect that the ECB was drawing up detailed plans to put a hard cap on Spanish and Italian bond yields.
An initial report in German weekly Der Spiegel on the potential bond-buying strategy of the ECB was played down by bank officials on Monday.
"While stocks are not making significant moves higher, they are holding onto recent gains, which suggests there is a belief that the Euro zone are about to turn a corner," said James Hughes, chief market analyst at Alpari.
"This could be in the form of central bank intervention, or a move by the Euro zone leaders to use the bailout funds to bring yields to sustainable levels. We may have to wait until the middle of September for this, but there is a feeling that a big announcement is near," he said.
Markets exuded calm on Tuesday as Spain's debt costs dropped at its latest auction with investors betting the ECB would take action.
Britain's FTSE 100, France's CAC40 and Germany's DAX have rallied between 10 and 15 percent in the last three months, with most of the gains registered since late July when ECB President Mario Draghi promised to do whatever it takes to save the euro.
The volatility index, a gauge of equity market investor anxiety, remained near May 2007 lows, and the put/call ratio of Euro STOXX 50 options held below 1, signalling that investors are getting more confident about the direction of euro zone stocks in the weeks to come.
Investors will keep a close eye on Greek Prime Minister Antonis Samaras's meeting with German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker later this week as he tries and secure more funding from the EU, International Monetary Fund and ECB, despite Greece falling behind on its debt cut targets.
Having led the fallers on Monday, cyclical mining and banking stocks were the best performing sectors early on Tuesday.
Commodities trader Glencore, down 0.4 percent, stuck to its guns on a $30 billion bid for miner Xstrata , up 1.1 percent.
"Ahead of the September 7 vote, though, we'll need to keep an eye on any further stake-building by the Qataris or indeed anyone else in cahoots with them for a better deal," Mike van Dulken, Head of Research at Accendo Markets, said.
Swiss private bank Julius Baer rose 2.5 percent after it said it would cut a rights issue to 500 million Swiss francs ($514.69 million) from an originally planned 750 million.
The mining and banking sectors still trade at a large discount to the FTSEurofirst on 10.2 times and 9.5 times forward 12-month price-to-earnings, compared with the index on 11.4 times, according to Thomson Reuters data.
Charles Morris, manager of the HSBC Absolute Return fund, said he had increased exposure to equities to near maximum over the past month, buying cyclical European stocks underpinned by Draghi's comments and valuations, with plenty of bad news already priced in.