European shares edged up on Friday as results from companies such as Telecom Italia reassured investors, and strategists said stocks might extend the rally after hitting seven-month highs this week.

Telecom Italia rose 5.6 percent after the company posted increased earnings, though it slashed its dividend to help reduce a debt pile of more than 30 billion euros. Trading volumes on the stock were twice the 90-day daily average before midday.

The earnings season has been mixed for European companies, failing to match performances in the United States, where equities are near their highest since early 2008.

Of the companies in the STOXX 600 <.STOXX> that have reported results, 52 percent have missed forecasts, according to Thomson Reuters StarMine data. This compares with just 32 percent for the S&P 500 <.SPX>.

But strategists said earnings were good enough to help equities gain ground, as too much pessimism had been factored into markets last year.

This rally has further to go. Results have been coming through in an acceptable fashion, said Alec Letchfield, Chief Investment Officer, Wealth at HSBC Asset Management.

People were becoming excessively cautious. Some of the worst expectations are not coming through. We could see a short-tern pullback but you don't want to play that as they're very difficult to finesse.

At 1204 GMT, the FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.3 percent at 1,078.02 points. The index is on course to fall 0.5 percent over the week, but is more than 26 percent up from the 2011 low it hit in September.

The index has broken through key technical levels in recent weeks, but is still 9 percent below a February 2011 high.

Euro zone banks <.SX7E> were also among the risers, up 1.5 percent. The sector has gained from the European Central Bank's

Long-Term Refinancing Operation, providing cheap funding for banks.

The LTRO has helped to offset some of investors' worries about the weak economic backdrop in Europe. Data Friday showed that Germany's economy contracted by 0.2 percent in the fourth quarter.

Ian King, head of international equities at Legal & General, said L&G had increased its exposure to financials in the past three months following the ECB's three-year financing operation and reduced exposure to defensive stocks such as consumer staples.

If there is a large take-up in next week's fresh ECB cheap loan offering it is a sign banks are making the most of the activity to improve their balance sheet and it will have important market consequences, King said.

Deutsche Bank rose 3.8 percent after analysts at Bank of America Merrill Lynch upgraded the stock to buy, citing good prospects for its investment bank as well as its German business.

CAUTION

Some analysts were worried economic austerity measures being taken by several governments in Europe could make it hard for companies to make profits in the second half.

I do not think it is a good idea to jump in the market right now and if we get any further indications of recession in Europe, we could see a pull-back of 10 to 20 percent over the long term, said Koen De Leus, strategist at KBC Securities.

But Letchfield said he had been adding to equities and credit as the valuations remained attractive and better than the alternatives.

We really don't like government bonds because of their valuations, he said.

He favoured stocks like drinks heavyweight Diageo because of its exposure to emerging markets.

Among other companies, chemicals heavyweight BASF rose 1.2 percent after it said sales and earnings would rebound in the second half, countering expectations that business would shrink this year.

Traders also said they were encouraged by the dividend increase, which was ahead of forecasts, and WestLB confirmed its add rating on BASF.

(Additional reporting by Joanne Frearson; Editing by Erica Billingham)