*

Asia shares rise, helped by China optimism

*

Investors watch Sunday's election in Germany

*

Gold perched near record high

*

Weak French PMIs, German PMIs up slightly

*

British retail sales rise

*

Yen pulls back after BOJ governor remarks

(Updates after early European trading)

By Rae Wee and Alun John

SINGAPORE/LONDON, Feb 21 (Reuters) -

European shares rose on Friday, following peers in Asia,

which hit a three-month high on AI optimism, though gains were

tempered by uncertainty over developments in Ukraine and the

upcoming German elections.

Europe's broad Stoxx 600 nudged up 0.2%,

reversing two days of declines and pushing back towards a record

high hit earlier in the week.

Germany is one

major focus in Europe

, and shares have been volatile this week as investors try

to position ahead of

Sunday's election

.

Their main question is whether it will result in a

government and parliament willing or able to reform the

country's "

debt brake"

, which limits Germany's structural deficit.

The blue-chip DAX, one of 2025's

best-performing benchmarks so far, was flat around 2.5% below

Wednesday's record peak. D

omestic-focused German mid caps

were up 0.8% on Friday, having hit a seven-month high early

this week before falling sharply.

"With DAX up 13% year-to-date, it may see some downside

if the status quo prevails and smaller parties secure a blocking

minority," said analysts at Barclays.

In contrast, if a more pro-reform parliament is elected,

they see potential for both mid and large caps to gain.

More spending would likely

boost the euro

, and weigh on government bonds.

Investors are also trying to process the implications of

negotiations between the U.S. and Russia over a possible

ceasefire in Ukraine.

Shares in Europe had been rising on

hopes of peace

, but have recently stalled, and hostile rhetoric from U.S.

President Donald Trump toward Ukraine has left investors in its

bonds

in shock

.

There was economic data out too. Business activity in

Germany's private sector

picked up slightly in February, but contracted by much more

than expected

in France.

British retail sales

rose in January.

Overall, this left the euro lower against both the pound

and the dollar at $1.1047 and 82.76 pence.

U.S. share futures were flat.

CHINA SURGE

There was plenty happening in Asia too, and MSCI's

broadest index of Asia-Pacific shares outside Japan

jumped more than 1% to its highest since

November 8 on Friday, putting the index on track for a sixth

straight week of gains - the longest such winning streak in over

two years.

The move was led by a surge in Hong Kong- and

China-listed stocks, which saw the Hang Seng Index scale

a three-year peak and push the CSI300 index 1%

higher.

Alibaba ( BABA ), up 12.7% after it reported

better-than-expected revenue, was the day's poster child, but

Chinese stocks have been on a tear in recent days, driven by

DeepSeek's AI breakthrough that reignited investor interest in

China's technology capabilities.

The Hang Seng Tech Index has gained nearly 30% for the year

thus far, the S&P 500 is up just 4% over the same period.

"DeepSeek has been a catalyst for sentiment changing," said

Brian Arcese, portfolio manager at Foord Asset Management.

Also in the mix, earlier this week, Chinese President Xi

Jinping held a rare meeting with some of the biggest names in

China's technology sector, urging them to "show their talent"

and be confident in the power of China's model and market.

The other mover in Asia was the Japanese yen, which took a

breather after its recent rapid appreciation.

The dollar was last up 0.5% on the yen at 150.4 after yen

comments from Bank of Japan Governor Kazuo Ueda eased concerns

that the central bank may be considering a more aggressive rate

hike stance.

Those comments trumped data also Friday showing Japan's core

consumer inflation hit 3.2% in January, its fastest pace in 19

months.

In commodities, oil prices dipped but were headed for a

weekly gain.

Brent crude oil futures eased 0.41% to $76.14 a

barrel, but were set to rise more than 2% for the week.

Gold hovered near a record high and was set to extend

its gains for an eighth consecutive week.