*

European stocks touch record highs, defence stocks rally

*

Euro zone borrowing costs rise on spending boost

expectations

*

Gold gains on U.S. tariff uncertainty, inflation worries

*

European futures at record highs

*

Investors wait on U.S-Russia talks

(Updates prices)

By Naomi Rovnick and Tom Westbrook

LONDON/SINGAPORE, Feb 18 (Reuters) - European shares hit

record highs on Tuesday and Wall Street stock futures advanced

as traders gambled on a big European defence spending hike,

while strong U.S. earnings overshadowed fears of trade tariffs

deterring Federal Reserve rate cuts.

The pan-European STOXX 600 index hit an all-time

high of 556.81 early on Tuesday before easing to 556.1 as a

gauge of defence and aerospace stocks rose 1.3% after

rallying more than 4% on Monday.

A Chinese stock rally cheering Monday's rare meeting between

President Xi Jinping and domestic business leaders also boosted

risk-taking appetite, helping lift futures contracts tracking

Wall Street's S&P 500 and Nasdaq 100 about 0.3%

higher.

As European leaders vowed to step up support for Ukraine if

bilateral talks this week between Russia and the U.S. lead to a

hasty peace deal that compromised Europe's security, investors

also hope this weekend's German election will lead to economic

stimulus.

"That means massive fiscal transformation in Europe," said

John Hardy, global head of macro strategy at Saxo Bank in

Denmark. He expected Europe's STOXX index to outperform Wall

Street this year, meanwhile, as investors also fretted about

U.S. trade tariffs, inflation and highly valued tech stocks.

Europe's stock indices are dominated by industrial groups,

energy producers and banks and attracted their biggest weekly

investment inflow last week since January 2023, Bank of America

said.

"The idea is very simple: overvalued U.S. tech (and)

attractive value in Europe," Lombard Odier Investment Managers

multi-asset portfolio manager Florian Ielpo said.

"That old (economy) world now looks very attractive."

Key measures of U.S. inflation are also running at a half

percentage point or more above the Fed's goal, with some of its

officials arguing to delay rate cuts.

Minutes from the Fed's January meeting, where it held

borrowing costs at 4.25% to 4.5%, are due on Wednesday. That

follows hawkish comments from central bank chair Jerome Powell

in testimony to Congress last week and hot consumer prices data.

U.S. retail sales last Friday, however, were weaker than

economists polled by Reuters had expected.

GOLD SPARKLES

Geopolitical anxiety drove the spot gold price 0.6% higher

to $2,914 an ounce on Tuesday, but failed to spark haven

buying of government bonds weighed down by spending and

inflation concerns as oil prices also softened.

Expectations for higher government spending lifted Germany's

benchmark 10-year bond yield to 2.5%, near its

highest level of the month.

The 10-year U.S. Treasury yield added 4 basis

points (bps) to 4.53% and Britain's equivalent gilt yield rose 3

bps to 4.56%.

Brent crude oil was steady at $75.26 a barrel as

traders awaited the outcome of the Russia-U.S. talks taking

place in Riyadh and speculated about potential supply increases

if Washington agrees to abandon sanctions on Russian oil.

Elsewhere in markets, the euro was 0.3% lower

against the dollar at $1.045 as tariff fears and geopolitical

concerns lifted the U.S. currency's haven appeal.

Sterling also edged 0.3% lower to $1.259 and

Japan's yen lost 0.2% against the dollar despite

growth data having bolstered prospects for Bank of Japan rate

hikes.

Australia's dollar was 0.2% lower at 0.63%, having

been spared blows from the central bank's first rate cut since

2020 on Tuesday as policymakers delivered it with caution about

prospects of further easing.

In Asian stocks, Hong Kong's Hang Seng Index jumped

1.6% to its highest since early October as Chinese tech groups

rallied. Japan's Nikkei rose 0.5% with bank and

defence-related shares taking their cues from Europe's rally.