European shares set 7-year high after Greek rescue deal

* FTSEurofirst 300 up 0.5 pct after setting 7-yr high

* Market sentiment improves after Greece deal

* Dax off record high after Ifo miss

* Britain's FTSE lags after HSBC profit falls

By Francesco Canepa and Atul Prakash

LONDON, Feb 23 (Reuters) - European equities set a seven-year highs on Monday, boosted by a late Friday deal to extend Greece's financial rescue package, although sentiment was dampened by a disappointing German morale survey.

Britain's FTSE 100 index was the only major index to trade in negative territory after HSBC reported a 17 percent drop in annual profit. The bank's shares 5.5 percent lower and weighed on peer Standard Charted.

Athens sealed a deal with euro zone partners to avoid a banking collapse by accepting a conditional extension of its bailout programme and agreeing to present a reform plan, sending European shares sharply higher early on Monday.

The pan-European FTSEurofirst 300 index was up 0.5 percent at 1,532.71 points at 1509 GMT after touching its highest level since early 2008 at 1,535.07.

"We have cleared the first hurdle but Greece has to come up with a serious set of measures now," Peter Dixon, equity strategist at Commerzbank (Xetra: CBK100 - news) , said. "Over the course of the next few months, we will be having more discussions and possibly a lot more market volatility."

European indexes trimmed their early gains after a German business climate index by think tank Ifo came below market expectations, even if it set a seven-month high.

Germany's Dax equity index was up 0.4 percent after setting an all-time high before the Ifo survey was published.

The Dax is up 13 percent year to date and currently trades in overbought territory on a number of momentum indicators such as Bollinger bands and stochastic indexes.

"The Ifo index was a little bit weaker than expected but we only saw a small reaction," Christian Henke, an analyst at IG (LSE: IGG.L - news) , said.

"The sentiment is bullish but the Dax is slightly overbought so a small consolidation is possible."

Dutch mail group PostNL was the top riser in Europe as it rose 10.7 percent, after it reported better than expected fourth-quarter profits, with growth in its parcels business and cost savings more than compensating for falling volumes in mail delivery.

Shares (Frankfurt: DI6.F - news) in Banca Monte dei Paschi (Milan: BMPS.MI - news) di Siena rose 4 percent on expectations of a favourable outcome for the lender's upcoming 3 billion euro ($3.40 billion) capital increase, including the prospect of the Italian state taking a stake in the troubled bank. (Editing by Angus MacSwan)