* FTSEurofirst 300 index rises 2.9 pct after Fed minutes
* ECB reiterates it may buy sovereign bonds
* Tesco top gainer after trading update
* Monte Paschi rallies on Santander merger speculation
* Greek shares lag on election worries
By Francesco Canepa and Atul Prakash
Jan 8 (Reuters) - European shares rose on Thursday as a strong Christmas update from Britain's Tesco boosted retailers and Federal Reserve minutes showed the U.S. central bank was not in a hurry to start raising interest rates.
The FTSEurofirst 300 index of top European shares closed 2.9 percent higher at 1,368.37 points, recouping all the ground lost since the start of the year.
Retailers led the bounce on Thursday, with the STOXX Europe 600 Retail index up 4 percent. Tesco shares jumped 15 percent after it reported better-than-expected sales in the six-week Christmas period and unveiled plans to sell assets and cut hundreds of millions of pounds of costs.
"Four Christmases and four profit warnings later, it seems Tesco has turned the corner," Manish Singh, head of investment services at Crossbridge Capital, said.
But Marks & Spencer fell 3.5 percent after posting a bigger-than-expected 5.8 percent drop in underlying sales of clothing, gifts and homeware over Christmas.
Broadly, the market got support from the Fed minutes and the prospect of new stimulus from the European Central Bank. Fed officials said they could be "patient" in deciding when to begin the process while ECB president Mario Draghi said in a letter the bank may purchase assets including sovereign bonds.
Shares in Santander, the euro zone's biggest bank, were suspended just before announced it would cut its dividends this year and boost its capital with a 7.5 billion euro ($8.8 billion) share placement.
"That's a big surprise for me," Yohan Salleron, an equity manager at Mandarine Gestion, said. "We met Santander one month ago and they didn't say they needed a capital increase."
Italy's Monte Paschi, which is looking for a buyer after emerging as the weakest bank in a Europe-wide health check of the sector, soared 12.4 percent on speculation about a potential takeover by Santander.
Greek stocks lagged again, falling 2.1 percent after the ECB said Greek banks' access to ECB funding beyond February would depend on Athens successfully completing a final bailout review and agreeing a follow-up plan with its EU/IMF lenders.
The statement was the clearest warning yet that Athens cannot expect to rely on ECB funding if it reneges on obligations under the 240 billion euro bailout programme, a risk that has grown as Greece prepares for Jan. 25's snap election.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up (Reporting by Francesco Canepa; Editing by Catherine Evans)