(Adds analysis, quotes, stocks on the move)
SYDNEY, Dec 23 (Reuters) - Australian shares added 0.5 percent on Monday to touch three-week highs after Wall Street edged higher, but trading was subdued ahead of the Christmas holiday.
The financial sector underpinned the market with the Commonwealth Bank of Australia (Other OTC: CBAUF - news) rising 1.2 percent and Westpac Banking Corp up 0.9 percent. Elsewhere insurer QBE Insurance Group Ltd climbed 1.4 percent while AMP Ltd jumped 1.8 percent.
The 'Big Four' banks have had a stellar year, rising between 23.2 percent and 38.3 percent in share price, compared with the broader market's gain of 13.8 percent this year.
Trading volume was subdued with 112.2 million shares trading hands by 0025 GMT, compared with a daily moving average of 683.9 million shares so far in 2013.
The S&P/ASX (Berlin: AUX.BE - news) 200 index rose 24.2 points to 5,289.4 by 0033 GMT, its third consecutive session of gains. The benchmark climbed 1.2 percent on Friday and rose 3.1 percent for the week, its biggest one-week gain since April (Frankfurt: B2B.F - news) , snapping four consecutive weeks of losses.
"It's that time of year, the fund managers don't tend to sell. It's a very dangerous time to be short and if the market can squeeze up they will," said Shawn Hickman, managing director at Market Matters.
"Historically every year this is a strong time for the market and we're seeing this at the moment."
The local market has recovered from 4-month lows of 5,027.7 touched on Dec. 12 after the Fed announced last week a plan to trim its monthly bond purchases by $10 billion to $75 billion beginning in January, and pledged to maintain ultra-low interest rates.
Boart Longyear Ltd rallied 15.5 percent to five-week highs of A$0.40 after the drilling services company said it expects its full-year 2013 results to not vary materially from its outlook from October 2013.
The resources sector was a touch weaker after copper prices were on track for a 3 percent fall in December and gold is set to post its biggest annual loss in 32 years.
QrXPharma Ltd jumped 11.3 percent to a 1-1/2-month high of A$0.69 with analysts saying they expected a statement to be released to the ASX.
Syrah Resources Ltd climbed 8.9 percent, a 2-1/2-month high of A$2.84 after the Mozambique government granted the company a 25-year mining licence for its Balama project.
New Zealand's benchmark NZX 50 index rose 0.7 percent to 4,711.8.
(Reporting by Thuy Ong; Editing by Jacqueline Wong)