UPDATE 2-Earnings, trade optimism help European shares ahead of Fed decision

* BNP Paribas, Credit Suisse rise on good earnings

* Lloyds slumps after weak pretax profit

* Fed decision expected at 1800 GMT (Updates to close)

By Medha Singh and Sruthi Shankar

July 31 (Reuters) - A slew of positive corporate earnings and optimistic signs from U.S.-China trade talks propped up European shares on Wednesday as investors braced for what would be the U.S. Federal Reserve's first interest rate cut in more than a decade.

Shrugging off a weak start, the pan-European STOXX 600 rose 0.2%, recovering from its worst day in nearly three months on Tuesday.

The trade-sensitive DAX rose 0.3% after U.S. and Chinese negotiators wrapped up a brief round of talks that both sides described as "constructive".

However, all eyes were on the Fed's policy statement, due at 1800 GMT, with money markets pricing in a roughly 80% chance that the U.S. central bank will cut rates by 25 basis points, in preference to a 50-point cut.

Fed Chair Jerome Powell's news conference - and what signs it provides on future easing - may prove, however, more crucial to market moves over the next few days.

"There's different views in the market about whether or not it (a rate cut) is kind of a one-and-done (deal) and investors are happy to take their time and really understand what signal the Fed is sending," said Marchel Alexandrovich, senior European Economist at Jefferies.

The Fed decision follows the European Central Bank's pledge last week to ease policy further and data on Wednesday showing euro zone economic growth halved in the second quarter and inflation slowed sharply in July made the case for aggressive action.

The turn of central banks globally towards monetary easing had driven sharp rises in stocks in June and early July but after a mixed earnings season and Tuesday's sell-off, the STOXX index ended the month up just 0.2%.

Earnings on a handful of major European banks was again contradictory.

Lloyds Banking Group, Britain's biggest mortgage lender, dropped 3.2% after posting weaker-than-expected pretax profits, taking London's FTSE 100 down -0.8%.

The euro zone banking index, however, gained as France's BNP Paribas rose 1.6% on a strong performance in corporate and investment banking and Credit Suisse 2.4% after reporting its highest quarterly earnings in four years.

"There's anxiety about bank profitability," said Alexandrovich. "But, for the markets, the immediate kind of excitement will be what kind of package of measures the ECB unveils in September for the sector."

The retail sector got a lift from fashion group Next , which jumped 8% after reporting a surprise 4% rise in full-price sales as it shrugged off Britain's retail gloom.

Sportswear group Puma also gained 8.4% as it raised its outlook for sales growth and operating profit for 2019. Rival Adidas advanced 3.7%.

Helping Italian shares outperform, Fiat Chrysler's shares rose 2.9% after the Italian automaker stuck to its full-year profit guidance after a strong performance from its Ram pickup truck in North America helped it defy an industry slowdown.

Ferrari's shares rose 1%. (Reporting by Medha Singh and Sruthi Shankar in Bengaluru; Editing by Alison Williams)