European shares rally after Fed rate hike, Casino slumps

* Pan-European FTSEurofirst 300 index ends up 1.3 pct

* Cyclicals outperform after Fed's first rate hike in nine years

* Casino slumps after Muddy Waters note

* Miners down as U.S (Other OTC: UBGXF - news) . rate hike lifts dollar (Adds details, closing prices)

By Atul Prakash and Danilo Masoni

LONDON/MILAN, Dec 17 (Reuters) - European shares surged on Thursday as investors took the U.S. Federal Reserve's interest rate rise and the prospect of further tightening as a sign of confidence in the world's biggest economy.

The Fed made clear late on Wednesday that the 25-basis point rate hike was a tentative beginning to a "gradual" tightening cycle.

"With (Other OTC: WWTH - news) the confirmation of the Fed rate rise due to a strong U.S. economy, investors took cheer as the decision formalises opinion that the U.S. economy is broadly expanding," said Lorne Baring, managing director of B Capital Wealth Management.

The pan-European FTSEurofirst 300 index closed up 1.3 percent after climbing to a one-week high, while Germany's DAX , France's CAC and Britain's FTSE 100 rose between 2.6 and 0.7 percent.

"With the Fed out of the way and only a couple of trading sessions left before Christmas, we could now see a traditional end-year rally," said Philippe Gijsels, head of research at BNP (Paris: FR0000131104 - news) Paribas Fortis Global Markets in Brussels.

"The new year will once again prove to be quite volatile as markets will start to anticipate the next rate hike."

European indexes came off previous highs as a rally on Wall Street lost momentum the day after the Fed decision.

But cyclical sectors such as automobiles, banking and insurance continued to perform well with gains of 1.5 to 2.8 percent, featuring among the top sectoral gainers in Europe.

Casino fell as much as 20 percent after the research firm Muddy Waters, founded by short-seller Carson Block, said the French retailer was one of the "most overvalued and misunderstood" companies it had ever come across.

Casino said the report contained "grossly erroneous allegations", while JP Morgan reiterated its "overweight" rating on the stock, saying it disagreed with Muddy Waters.

AstraZeneca (NYSE: AZN - news) rose 0.3 percent after the drugmaker said it had agreed to buy a 55 percent stake in the privately held biotech firm Acerta Pharma for $4.0 billion to give it access to a new kind of drug for fighting blood cancers.

"Acerta Pharma ... grants (AstraZeneca) access to Acerta's potentially best-in-class BTK inhibitor, acalabrutinib, in Phase III for the treatment of blood cancers and Phase I/II for solid tumors," Shore Capital analyst Tara Raveendran said.

The mining index fell 1 percent as prices of zinc and other major industrial metals dropped sharply as the dollar firmed after the U.S. rate increase. A stronger dollar makes metals more expensive for holders of other currencies.

Among mid-caps, the specialty chemicals maker Elementis fell 6.5 percent after saying markets had remained challenging and its earnings per share for the current year were now projected to be at the lower end of market expectations.

"Management's backtracking on what it said only end-October shows how things have further deteriorated in just six weeks and adds to pre-existing concerns about global growth, notably the U.S. and China," said Mike van Dulken, head of research at Accendo Markets.

(Editing by Kevin Liffey)