* FTSEurofirst 300 up 0.1 pct, Dax up 0.3 pct
* Strong German retail sales help sentiment
* Portugal's PCP, BPI rally on merger speculation
By Francesco Canepa
LONDON, March 3 (Reuters) - European equity indexes hovered close to multi-year highs on Tuesday, helped by better-than-expected German retail sales data and merger speculation in the Portuguese banking sector.
German retail sales rose more by 2.9 percent month-on-month, and 5.3 percent year-on-year, in January, more than economists had expected. That helped Germany's DAX index rise 0.3 percent to test an all-time high hit on Monday.
"We're buying the dips and when it reaches new highs we take a little bit of profit, but not too much," Markus Huber, a senior trader at Peregrine & Black, said.
Shares in Portugal's Banco BPI and Banco Comercial Portugues rose 6.5 percent and 5.5 percent respectively, on speculation about a possible merger.
This has been proposed by BPI shareholder Isabel dos Santos to stave off a takeover attempt by Spain's CaixaBank, according to the magazine Expresso.
Portugal's PSI index was up 0.8 percent, the best performer in Europe, at 0848 GMT.
The pan-European FTSEurofirst 300 index was up 0.1 percent at 1,562.85 points, just off a 7-year high set on Monday.
Keeping a lid on the index's gains, Barclays fell 1.7 percent after saying it had set aside an extra 750 million pounds ($1.15 billion) for potential fines arising from allegations of manipulation in the foreign exchange market.
The FTSEurofirst 300 has rallied 18 percent since early January in anticipation of the European Central Bank's bond-buying programme, which is due to start this month and is expected to lower yields in the bond market, cutting borrowing costs for companies and driving money into equities.
With many indexes trading at their highest valuation multiples in years, some investors were recommending picking single stocks, rather than making broad bets on entire indexes.
"Yes three's a multiple expansion, which is why you can just buy an index, but ultimately investors are going to make sure they they're not going to blow themselves up by stepping on the landmine of companies that are going to struggle," Mark Tinker, head of AXA Framlington Asia, said.
Europe bourses in 2015: link.reuters.com/pap87v
Asset performance in 2015: link.reuters.com/gap87v
Today's European research round-up ($1 = 0.6509 pounds) (Editing by Tom Heneghan)