European shares weighed down by insurers, exchange stocks

* Pan-European index down 0.2 pct

* Generali (EUREX: 566030.EX - news) biggest drag after Intesa drops takeover plan

* LSE, Deutsche Boerse (IOB: 0H3T.IL - news) tumble as tie-up expected to fail

* UK motor insurers tumble after new rules

* Adidas (IOB: 0OLD.IL - news) boosted by first upgrade in 7 months (Adds details, updates prices)

By Danilo Masoni

MILAN, Feb 27 (Reuters) - European shares inched lower on Monday weighed down by losses among insurers, while exchange operators tumbled on the expected failure of the London Stock Exchange's merger with Deutsche Boerse to create a European trading powerhouse.

The STOXX Europe 600 was down 0.2 percent, adding to steep losses seen in the previous session when the pan-European index fell to its lowest closing level in three weeks.

Assicurazioni Generali, down 3.7 percent, was the biggest drag to the STOXX after Intesa Sanpaolo (Amsterdam: IO6.AS - news) said late on Friday it had decided not to pursue a possible tie-up with Italy's biggest insurer.

The decision, which boosted shares in Intesa on relief that the Italian bank would not put at risk its dividend to pursue such a deal, prompted some analysts to downgrade Generali.

"As we do not expect another bidder our valuation now implies 10 percent downside," said RBC Capital Markets, which downgraded Generali to underperform from outperform.

Allianz (Swiss: ALV-EUR.SW - news) and AXA (Paris: FR0000120628 - news) , which were seen as potentially interested in Generali assets, were trading up 0.1 percent and down 0.5 percent respectively.

Britain's biggest motor insurers Admiral and Direct Line were under pressure, down 3 percent and 7 percent respectively, after the UK government announced new rules that push up lump sum payments for personal injury claims, a change the industry's trade body described as "crazy".

London Stock Exchange (Other OTC: LDNXF - news) and Deutsche Boerse both fell more than 3 percent. Late on Sunday LSE said its proposed merger with the German exchange was unlikely to be approved by the European Commission.

"LSE is also trading sharply lower as it becomes clear that the merger with Deutsche Boerse is on a knife-edge... There is a long, long way to fall if this tie-up dies," said Neil Wilson, market analyst at ETX Capital.

Among other listed exchange operators, Euronext (Euronext: ENX.LS - news) was down 2.9 percent and BME was flat.

Adidas, up 3.4 percent, after UBS (LSE: 0QNR.L - news) and RBC lifted their ratings on the stock in the first upgrade for the German sportswear group in seven months.

"We think upgrade cycle will continue this year and see opportunity for Adidas to surprise on sales growth, gross margin and operating leverage," UBS analyst Fred Speirs said in a note.

Among other top gainers were valve-control systems maker Rotork (Frankfurt: RO41.F - news) and business supplies distributor Bunzl (LSE: BNZL.L - news) , which were boosted by well-received earnings updates. (Editing by Ed Osmond)