European shares steady below peaks, Next rallies

* FTSEurofirst 300 down 0.1 pct

* Holds around 20 points below 5-1/2 year peak

* Next (Other OTC: NXGPF - news) hits record high on higher sales, special dividend

By Toni Vorobyova

LONDON, Jan 3 (Reuters) - European stocks steadied below their recent 5-1/2 year peaks on Friday, as a rally in retailers fueled by an encouraging update from Next was offset by a decline in mining shares following weak Chinese data.

Retailers gained 0.7 percent after Britain's Next (Frankfurt: NXG.F - news) reported strong Christmas sales, raised its profit forecast and announced a special dividend. Next shares jumped 10.3 percent, hitting an intra-day record high of 6,130 pence and on track for their biggest one-day jump in five years.

The update reassured investors about the health of the broader sector following a profit warning from rival Debenhams (Frankfurt: D2T.F - news) . Peer Marks & Spencer added 1.6 percent.

"Most of the phone calls have been about Next, people cutting shorts and going long," said Jordan Hiscott, a senior trader at Gekko Global Markets. Some of those short positions had been opened following the Debenhams (Other OTC: DBHSY - news) warning, he said.

Broader sentiment however, remained cautious. Investors took profits from a forecast-beating 2013 rally and adjusted their positions ahead of the first full week of the new year.

The FTSEurofirst 300 was down 0.1 percent at 1,304.64 points by 0836 GMT, extending Thursday's 0.8 percent drop after failing to hold a 5-1/2 year intra-day peak of 1,320.50.

The weakness is unusual. The start of the year tends to see investors putting fresh money into equities. Indeed, the FTSEurofirst 300 has only fallen on the first two trading days of the year once in the past decade - in 2008.

This time, the caution comes after a stellar 2013, when the FTSEurofirst 300 added 16 percent and the EuroSTOXX 50 index of euro zone blue chips rose 18 percent to 3,109.00 - more than 200 points higher than analysts had forecast before the start of last year.

"What we have seen from slightly more longer-term accounts is that they have had a cracking return from 2013 and they have taken some risk off the books," said Hiscott at Gekko. "They are looking to see which way the market moves in the first few weeks of January before taking new long positions."

Miners were among the worst hit sectors for a second day, after more weak data from China, the world's top metals consumer, which showed growth in the Chinese service sector fell to a four-month low in December. The STOXX Europe 600 Basic Resources index fell 0.7 percent.

Volumes remained relatively subdued, with many market participants on holiday until next week.

"Data calendar is relatively light today and we will not be surprised to see a bit more consolidations given the strong performance around the end of last year," analysts at Credit Agricole CIB said in a note.