* FTSEurofirst 300 up 0.5 percent; flirts with 11-month high
* Resource-related stocks lead rally as gold above $1,000
* France Telecom-Deutsche Telekom UK talks boost sector
By Blaise Robinson
PARIS, Sept 8 (Reuters) - Europe's leading share index was up 0.5 percent at midday on Tuesday, rising for the third consecutive session and flirting with 11-month highs, with miners shining as gold hurdled the $1,000 mark.
Propelled by technical momentum and a drop in the dollar, spot gold vaulted the $1,000 per ounce psychological barrier on Tuesday, just shy of last year's record high of $1,030.80, while prices of other metals such as copper and nickel also surged.
At 1108 GMT, the FTSEurofirst 300 index of top European shares was up 0.5 percent at 980.30 points, not far from an 11-month high of 986.59 points touched in late August.
Miners were the top gainers, with Rio Tinto up 3.1 percent, Anglo American up 2.9 percent and Xstrata up 2.6 percent.
"The break-out in gold was really sparked by weakness in the dollar. There is no other explanation. There is a lot of arbitrage between the two," said Philippe Waechter, head of economic research at Natixis Asset Management.
The dollar sank to its lowest level in nearly a year against a basket of major currencies on Tuesday, with traders citing talk of reserve diversification into gold undermining the U.S. currency while boosting the precious metal.
"There are recurring rumours that the Chinese Central Bank could convert part of their reserves into gold," Natixis AM's Waechter said.
"The fact is the portion of their reserves currently in gold is relatively small compared with other central banks, so there is a lot of speculation that they might have to adjust these levels."
Around Europe, UK's FTSE 100 index was up 0.5 percent, Germany's DAX index up 0.5 percent, and France's CAC 40 up 0.3 percent.
Telecom shares were also on the rise, after Deutsche Telekom and France Telecom said they have launched talks to merge their British mobile units in a joint venture that would grab the top spot in the UK market.
France Telecom gained 2.2 percent, Deutsche Telekom added 2.1 percent, while Vodafone climbed 2.6 percent, with traders citing relief that the firm was not involved in the merger talks.
The news also fuelled consolidation hopes across Europe, with Telefonica up 1.4 percent, KPN up 1 percent and Swisscom up 0.9 percent.
The talks between the two telecom providers came one day after U.S. firm Kraft Foods unveiled a takeover bid for UK group Cadbury, triggering hopes that a revival in mergers and acquisitions could give a second wind to the stock market's six-month rally.
"With M&A back on the agenda, the markets have found a new impetus," said John Murphy, analyst at ODL Securities.
"Whilst the markets have traded higher over the past few months, the truest sign that the credit markets are unfreezing will be the re-emergence of corporate activity," he added.
The FTSEurofirst 300 index of top European shares has surged 52 percent since reaching a floor in early March, but it is still down 16 percent from its level in mid-Sept 2008 before the collapse of Wall Street firm Lehman Brothers accelerated the global credit crisis. (Additional reporting by Atul Prakash in London; Editing by Greg Mahlich)