European shares set fresh 5-1/2 yr peaks despite Shell's slump

* FTSEurofirst 300 up 0.5 pct, sets fresh 5-1/2 yr peak

* Strong UK retail sales bolster sentiment

* Shell (LSE: RDSB.L - news) falls after surprise profit warning

By Toni Vorobyova

LONDON, Jan 17 (Reuters) - European shares edged up to fresh 5-1/2 year highs on Friday, with much stronger-than-expected UK retail sales reassuring about the strength of the region's economy and counterbalancing a profit warning by Shell.

British retailers reported the fastest annual sales growth in more than nine years in December, with activity expanding at more than double the expected pace.

The data offered much-needed good news on consumer demand after a crop of disappointing updates by the retailers themselves, and raised the prospect of Britons buying more goods from domestic and other European companies in the future.

Chiming in with signs of a consumer pick-up, hotel giant Accor (Paris: FR0000120404 - news) raised its operating profit goal for 2013, while jeweller Pandora (Other OTC: PNDZF - news) beat expectations thanks to strong Christmas sales.

Accor added 1.4 percent, and Pandora rose 2.9 percent.

Gains in consumer cyclicals helped the broad FTSEurofirst 300 index, which was up 0.5 percent at 1,343.90 points by 1135 GMT. The benchmark, which had started the session broadly steady, accelerated gains after the UK data, hitting fresh highs at levels last seen in mid-2008.

Earnings have become a key focus for investors, with analysts saying that a recovery in profits is needed to drive any further gains in stock prices, given that valuations are already at multi-year highs.

"Our view is that the positive sentiment and the number of investors that are behind the curve, and hold a lot of cash, are going to be forced into being a bit more risk-taking this year," said Stephen Walker, head of equities research and market strategy at Ashcourt Rowan (LSE: ARP.L - news) .

"But we wouldn't see markets a bargain ... so it really comes down to the extent to which companies deliver on earnings growth. Clearly consumer stocks can do well, but it does seem like quite a polarised thing - rather than it being good for everyone, it is good for some and bad for others."

Underscoring the risks, shares in heavyweight Royal Dutch Shell fell some 2.3 percent after the oil major warned that fourth quarter figures would be significantly lower than recent levels of profitability.

"Shell has broken with its recent custom of disappointing on earnings day - it is now dishing up the bad news ahead of time ... It highlights the difficulties in forecasting operational leverage at these oil behemoths," Neill Morton, analyst at Investec (LSE: INVP.L - news) said in a note, forecasting that consensus for 2014 net income could be cut by around 5 percent.

"The bulls will talk of 'kitchen sinking' and suggest this will be 'grist to the mill' for the new CEO to restructure the company. We remain to be convinced."

Shell's warning follows disappointments in the United States from Intel (Berlin: INL.BE - news) , Goldman Sachs (NYSE: GS-PB - news) and Citigroup (NYSE: C - news) .

In Europe, the quarterly earnings season does not really start until next week, but STOXX Europe 600 companies are seen missing consensus by 0.4 percent on revenues and by 0.9 percent on earnings, according to StarMine SmartEstimates, which focus on the predictions by the most accurate analysts.

The biggest disappointments are expected from telecoms, utilities and technology stocks.

"People are mainly looking at where earnings are going after lots of disappointing earning in the U.S. last night. There is lots of talk about a correction coming up. I still think underlying sentiment is good, but we probably will have a bit of a fall back," said Neil Marsh, strategist at Newedge.