* FTSEurofirst up 0.7 percent, highest since early May * EU crisis measures support sentiment, all eyes on ECB * Weak Chinese data underscores risks in global economy By Toni Vorobyova LONDON, July 2 (Reuters) - European equities scaled two-month highs on Monday, with heavily underweight investors rushing to take part in a rally fuelled by expectations of more policy action to come after concrete steps from politicians to combat the euro zone crisis. An EU summit at the end of last week unexpectedly yielded agreement on several bold initiatives, including allowing the euro zone's ESM bailout fund to inject money directly into stricken banks. Stimulus - most likely in the form of an interest rate cut - is now expected from the European Central Bank, which meets on Thursday and which has long called on politicians to act. "Expectations were low going into the summit and the summit delivered more than the pessimists had expected," said Kevin Lilley, European equities fund manager at Old Mutual AM. "There is enough there to keep the market happy, what we need now is the continuation of the positive news flow with the ECB coming up with measures, and that might shake out some of the bears as well ... They need to do at least a rate cut." The FTSEurofirst 300 was up 0.7 percent at 1,028.51 points by 1020 GMT, having earlier set its highest level since early May at 1,033.83 points and extending Friday's 2.6 percent rise which was its biggest one-day gain in seven months. In light of the EU summit measures, investment house Jefferies recommended longs on the Euro STOXX 50 index alongside the sale of safe-haven German Bunds. The euro zone blue chip index added 0.8 percent to 2,283.50, also hitting two-month highs after a wobbly start to the session. "The trend is clearly towards adding in Europe," said Patrick Moonen, senior equities strategist at ING Invest Management. "Given where investor positioning was before the summit - it was extremely cautious and Europe was largely underweight ... we do expect that the euro zone will start to outperform, most particularly the U.S. market ... In the next couple of weeks we could easily have another 5-6 percent." 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 politicians' moves cheered the banks, which have direct exposure to the region's debt crisis through their sovereign bond holdings. The sector added 1.4 percent. Credit Agricole was the biggest gainer on the FTSEurofirst 300, up 6.8 percent with the broad sentiment lift bolstered reports that the French bank is in talks at least one bank to sell all or part of its struggling Greek unit Emporiki Bank. Credit Agricole declined to comment. RISKS Market players, however, stressed that risks remained. A reminder of the outstanding issues within the euro zone itself came from news that Finland and the Netherlands plan to block the euro zone's permanent bailout fund from buying bonds in secondary markets. Outside the euro zone, the health of the global economy is the primary concern as European companies which are increasingly looking abroad for earnings growth as the region's domestic economy stumbles. There was little cheer to be found in data showing that factory activity in China's private sector shrank at its fastest pace in seven months in June. "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," said Baader Bank equity strategist Gerhard Schwarz.