European shares at five-year highs ahead of Fed taper decision

* FTSEurofirst 300 rose 6.32 points to 1,258.95

* Smiths rallies on special dividend

* Barclays (LSE: BARC.L - news) trades ex-rights

* Aberdeen Asset Management (Other OTC: ABDNF - news) fall on MS earnings cut

By David Brett

LONDON, Sept 18 (Reuters) - European shares traded at five-year highs by midday on Wednesday as investors kept their nerve ahead of an expected first cut to the U.S. Federal Reserve's economic stimulus programme.

The FTSEurofirst 300 was up 6.32 points, or 0.5 percent at 1,258.95, by 1014 GMT, just above the five-year closing high hit on Monday.

The Fed decision will not come until after European markets close around 1800 GMT but has dominated trade for the past week.

The U.S. central bank is expected to announce it is paring back its $85 billion monthly purchases of bonds. The latest Reuters poll forecast a $10 billion reduction, although there is speculation among traders it could be even less.

Markets remain relatively calm, with volatility - a crude gauge of investor fear - still near historic lows despite concerns over how the economy will perform once central banks begin scaling back their support.

Deutsche Bank (LSE: 0H7D.L - news) strategist Jim Reid said that economic data was improving but not consistently firm enough for the Fed to be able to accelerate the stimulus withdrawal, predicting its balance sheet would still be expanding in a year's time.

Fund managers too appear optimistic about the outcome of the Fed meeting. Demand for "put options" on the Euro STOXX 50 (Zurich: ^STOXX50E - news) , used by managers to protect their portfolios against potential pull-backs, has been fading before September derivative contracts expire on Friday.

Charts, however, show a bearish technical pattern shaping up on a number of euro zone indexes including the blue-chip Euro STOXX 50 benchmark. That could signal the start of a pull-back in the next few days after a sharp three-month rally, technical analysts warn.

Atif Latif, director at Guardian Stockbrokers, said only a cut to stimulus of $15 billion or more - adding $5 billion in mortgage backed securities to the $10 billion cut in Treasuries purchases - would be negative for the market in the short term.

"A cyclical recovery remains on track and ... we take the view that even with a move lower (for equities) this continues to provide an attractive entry point," he said.

SMITHS RISES

British engineer Smiths Group (LSE: SMIN.L - news) rose 3.5 percent to top the list of European risers and was on track for its highest close in two-and-a-half years after announcing a special dividend of 30 pence per share in full-year 2013 results.

"(The special dividend) highlights a company fully confident in outlook, and one that is in the view of Prime Markets set for further near-term share price growth," said Richard Curr, head of dealing at Prime Markets.

Barclays traded without the right to buy shares in its 5.95 billion pound rights issue, falling sharply to 279.79 pence from its official closing price on Wednesday but above the share's theoretical ex-rights price of 276.2 pence.

French bank BNP Paribas (Milan: BNP.MI - news) lagged broader gains after two Belgian business newspapers reported the Belgian government may sell part of its 10.3 percent stake

That would follow Britain's sale of a 6 percent stake in Lloyds, up 2.1 percent, which has raised expectations the state might sell all its stake by mid-2015.

Goldman Sachs (NYSE: GS-PB - news) ' double-upgrade of HeidelbergCement to "buy" from "sell" lifted the firm's shares 2.2 percent.

Aberdeen Asset Management fell 4.6 percent to the bottom of leading European and British equity indexes, which traders attributed to a price target and earnings cut by Morgan Stanley ahead of the fund firm's trading update.

"We believe consensus underestimates the downside risks from equity outflows and weak fund performance, which we are becoming increasingly concerned (despite Sept. bounce) will challenge future growth," Morgan Stanley (Xetra: 885836 - news) said in a research note.