* FTSEurofirst 300 index finishes 1.8 pct higher
* Cyclical stocks advance on trade data from China
* Industrial shares underperform, outlook negative
By Atul Prakash
LONDON, April 10 (Reuters) - European shares hit a one-week closing high on Wednesday and posted their biggest daily rise in three months, after encouraging Chinese economic data and a record high on a leading U.S. equity index.
Sectors that generally perform better on signs of improvement in economic activity were the top gainers, with banking, autos, construction and mining stocks all surging after data showed a surprisingly big rise in imports in China, the world's second-largest economy.
That raised expectations that domestic demand was gathering the steam needed to drive a recovery in the economy, which in turn would help the global economy to gather momentum.
The FTSEurofirst 300 index ended 1.8 percent firmer at 1,186.17 points, the highest close since April 3 and the biggest one-day gain in three months, also helped by the U.S. S&P 500 index's rise to a new all-time high.
Some analysts said the European share moves on Wednesday were a knee-jerk reaction to the Chinese numbers and that the medium-term outlook for stocks remained challenging.
"China's import figures show the economy is doing well. These numbers are quite positive for the market in the short run, but its impact, especially on commodity stocks, will be neutral in the medium term," said Christian Stocker, equity strategist at UniCredit in Munich.
"We are in a volatile environment and the focus is on earnings. In Europe, we are cautious on the earnings reports of industrial companies, which have a negative outlook because of poor growth in the region and low industrial production."
The STOXX Europe 600 Industrial Goods & Services index rose 2 percent but underperformed several cyclical sectors such as banks, up 3.5 percent, insurance , up 2.8 percent, and autos, up 2.6 percent.
"We have just downgraded industrials on the basis that the March data prints in Europe were disappointing. You need to have a more balanced approach to the markets at the moment, rather than be full on outright cyclicals," said Graham Bishop, senior equity strategist at Exane BNP Paribas.
However, Wednesday was a winning day for cyclicals. A strong gain in financials also on the back of Japan's aggressive monetary easing policy and a potential extension of loans to debt-stricken Ireland and Portugal helped several regional indexes to outperform the wider market.
A 4.3 to 7 percent jump in Spanish banks such as Bankinter , BBVA, Banco Popular and Santander helped the country's benchmark share index to advance 3.4 percent, while Italy's FTSE MIB was up 3.2 percent on stronger banks and auto stocks.
HEADING FOR PROFIT-TAKING?
The euro zone's blue chip Euro STOXX 50 index gained 2.6 percent to 2,661.62, with the index closing just above its 50-day moving average, prompting some investors to advise caution in the near term.
"Along with most other leading indices, the Euro Stoxx 50 has found solid support. But I expect the rally to start losing momentum over the coming few days once profit-taking takes hold," said Fawad Razaqzada, technical analyst at GFT Markets.
Some analysts argued the stock market's longer-term outlook remained positive. Liquidity injected by central banks across the world was a dominant driver and equity valuations are not yet a problem for the market, they said.
The price to earnings ratio for the Stoxx Europe 600 index has gradually moved higher in the past months to 11.76 now but is still below its long-term average of 12.18 and 13.5 times one-year forward earnings for the S&P index.
Percival Stanion, head of asset allocation at Baring Asset Management, said he had become overtly positive on risk assets and was getting more confident in the resilience of the U.S. economy.
"In Europe, the situation is still challenging but there are signs of a tepid recovery - the banking sectors in South Europe are beginning to show signs of normality. Even countries like Ireland are beginning to see the markets open up to funding."