* Tech shares jump even as earnings expectations slump
* Share rally boosted by M&A hopes, weaker euro
* Chart on tech shares and EPS: http://bit.ly/2a1Z9bk
By Atul Prakash
LONDON, July 26 (Reuters) - European technology shares hittheir highest level this year on Tuesday, disconnecting fromearnings downgrades and riding on hopes of merger activity andimproved competitiveness from a weaker euro.
The STOXX Europe 600 Technology index has ralliednearly 20 percent from a trough hit after Britain's June 23 voteto leave the European Union rattled European markets.
SoftBank's move last week to acquire Britain's mostvaluable tech firm ARM for $32 billion has spurred hopesof more deal making in the sector, lifting valuations even asexpectations for earnings growth have remaineddepressed.
The sector also stands to benefit from a more than 5 percentdrop in the euro against the dollar since early May, as manyEuropean tech companies have costs in euros but earn revenues inthe U.S. currency, analysts said.
The sector trades at 17.8 times forward earnings, a 10percent premium over its average over the past decade, accordingto Thomson Reuters data.
Earnings expectations for the sector have come off since thestart of the year, with analysts now forecasting that earningsper share will fall by 4 percent for 2016. In January they wereexpected to rise 17 percent. http://bit.ly/2a1Z9bk
That leads some analysts to predict shares are close topeaking.
"It seems that we are trading near the peak levels in thesector," said Veysel Taze, senior analyst at Oddo Seydler Bank.
Tech companies that serve the automobile and otherconsumer-related sectors should do well, but those dependent ongrowth of mobile devices are likely to struggle as smartphonesales slow, Taze said.
(Editing by Vikram Subhedar and Susan Fenton)