European stocks rallied on Friday, with a key index hitting a level not seen since before the market's early August nosedive, fuelled by renewed expectations of a bailout deal for Greece that would further ease tensions over the euro zone debt crisis.

The FTSEurofirst 300 <.FTEU3> index of top European shares closed 0.6 percent higher at 1,083.22 points, led by shares of euro zone lenders among the most exposed to the Greek crisis such as Societe Generale and Credit Agricole , up 6.5 and 4.7 percent respectively.

The index has gained 1.8 percent on the week, posting a fifth weekly gain for the year.

Debt-troubled Greece seemed to be edging closer to an agreement for a new rescue package that would allow the country to begin a debt swap with private bondholders and avoid a messy default, though nothing was announced on Friday.

No Greek news is good news, said Peter Garnry, equity strategist at Saxo Bank in Copenhagen.

Investors seem to be positioning for a deal on Greece which would lift uncertainty in the short term.

Expectations that an agreement could be struck before a meeting of euro zone finance ministers on Monday fuelled a rally in stocks of euro zone peripheral countries, with Greece's ATG index <.ATG> surging 5 percent, Spain's IBEX <.IBEX> up 1.2 percent and Italy's FTSE MIB <.FTMIB> adding 1.1 percent.

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Asset returns in 2012:

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Euro zone debt crisis in graphics:

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The euro zone's blue-chip Euro STOXX 50 <.STOXX50E> index ended 1.2 percent higher at 2,520.31 points, moving back into its two-month ascending channel after breaking below the lower band of the channel during Thursday.

A deal seems to be imminent, although it would really just kick the can further down the road for Greece, said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.

When the deal is finally reached, investors will turn their focus on the ECB's next 'LTRO' operation, which could fuel the stock rally and push the Euro STOXX 50 to above 2,600 points, and even to 2,700.

FUNDING FRENZY

Last December, the European Central Bank ratcheted up its funding operations with its first offer of three-year money at rock-bottom interest rates, drawing demand of close to 500 billion euros ($658 billion) and sparking a relief rally in European equities.

The central bank is set for a second long-term refinancing operation (LTRO) at the end of this month and economists polled by Reuters expect the funding operation to attract roughly the same volume of bids.

This year, the FTSEurofirst 300 has gained 8.2 percent, Germany's DAX <.GDAXI> 16 percent, Italy's FTSE MIB 9.7 percent and Spain's IBEX 1.1 percent.

Italian equities were excessively hammered last year, while Spanish stocks have outperformed, but the risk is clearly more on Spain than Italy, Jimenez said.

Diamant Bleu Gestion's European equity funds are overweight on Italian stocks and underweight on Spanish stocks.

Around Europe, UK's FTSE 100 index <.FTSE> gained 0.3 percent on Friday, Germany's DAX <.GDAXI> rose 1.4 percent, and France's CAC 40 <.FCHI> added 1.4 percent.

EUROPE LAGS

France's Lafarge featured among the biggest gainers across Europe on Friday, surging 8.3 percent in brisk volume after the world's biggest cement maker posted better-than-expected quarterly results and pledged to slash debt in 2012 with further disposals and cost cuts.

So far in the earnings season, about half of Europe STOXX 600 <.STOXX> companies have reported results, and 51 percent have beaten or met analyst forecasts, according to Thomson Reuters Starmine data.

The materials sector, home of steel and mining groups, has posted the worst sectoral performance, with only 24 percent of companies beating or meeting forecasts.

The figures pale in comparison with earnings numbers out of the U.S., where 81 percent of S&P 500 <.SPX> companies have reported results, of which 69 percent beat or met forecasts.

($1 = 0.7597 euros)

(Editing by David Hulmes)