Europe shares pause after best start of year in decades

* FTSEurofirst 300 down 0.1 pct, gains 14 pct in 2 months

* Airbus surges after posting sharp rise in operating profits

* 'Capitulation of shorts' could fuel rally -Mirabaud's Plassard

* European stocks at highest P/E ratio since 2004 (Adds detail, updates prices)

By Blaise Robinson and Alistair Smout

PARIS/LONDON, Feb 27 (Reuters) - European shares edged higher on Friday, pausing after their best start to the year since regional benchmarks began in late 1986, but still supported by positive earnings reports.

Shares (Frankfurt: DI6.F - news) in Airbus were up 7.5 percent after it posted a sharp rise in operating earnings, also announcing its biggest ever dividend.

Bank of Ireland (Other OTC: IRLD - news) rose 7.2 percent after posting its first annual profit since the financial crisis, while shares in International Airlines Group rose 2.8 percent upgrading its 2015 profit forecast by more than 20 percent.

Bucking the trend, Belgian telecom company Belgacom (LSE: 0DPU.L - news) 's shares lost almost a 10th of their value after quarterly profit and 2015 forecasts came in below market expectations.

Belgian firm UCB fell 5.1 percent after the pharmaceutical company profit outlook missed analyst expectations.

About two-thirds into Europe's earnings season, 55 percent of companies have met or beaten analyst forecasts. Fourth-quarter earnings are set to grow 14.9 percent, according to Thomson Reuters I/B/E/S, which would be Europe's best earnings season in 3-1/2 years.

"Earnings in general have been encouraging. The U.S. earnings picture is looking challenging, but European earnings are being upgraded," said Frédérique Carrier, director of European equities at RBC Wealth Management.

"In Europe you have better earnings momentum and you have valuations that are not stretched."

At 1434 GMT, the FTSEurofirst 300 index of top European shares was up 0.2 percent at 1,559.88 points, after hitting a fresh seven-year high earlier. The broader STOXX 600 was also up 0.2 percent.

"The rally in stocks is so strong that we could see a capitulation of (short-sellers) at some point, which would push the market even higher. Clearly some indexes have reached frothy valuation levels, but we're still long in the short term," said Mirabaud Securities senior equity sales trader John Plassard in Geneva.

European stocks are up 14 percent so far this year, boosted by the prospect of the European Central Bank's quantitative easing programme set to start in March.

The rally has left the STOXX 600 trading at the highest valuation multiple in 11 years, and deep in 'overbought' territory on technical charts.

Despite a nascent recovery in earnings, the STOXX 600 is trading at 16 times expected earnings in the next 12 months, its highest price-to-earnings ratio (P/E) since early 2004 and well above a 10-year average P/E of 11.8.

Europe bourses in 2015: http://link.reuters.com/pap87v

Asset performance in 2015: http://link.reuters.com/gap87v

Today's European research round-up (Additional reporting by James Regan)