European shares build on recovery as dealmaking dominates

* STOXX 600 ends up 0.3 pct

* Banks in focus after report UniCredit (EUREX: DE000A163206.EX - news) exploring SocGen (Paris: FR0000130809 - news) merger

* Air France (Paris: FR0000031122 - news) rallies as AccorHotels interested in a stake (Adds details, closing prices)

By Helen Reid

LONDON, June 4 (Reuters) - European shares extended a recovery on Monday as dealmaking took centre stage after a week of political tension in Italy and Spain as well as friction between the United States and its allies over trade policies.

Investors' concerns over trade were overshadowed by very strong U.S. jobs data on Friday, which helped Wall Street to rise for a second day on Monday. Europe's STOXX 600 gained 0.3 percent and Germany's DAX 0.4 percent.

News about mergers and acquisitions, particularly in the financial sector, drove the biggest moves.

M&A has been a key trend in equity markets globally this year, with Britain among the most active for deals, helping the FTSE 100 to start to outperform euro zone stocks.

Bank stocks jumped as much as 1.3 percent after the Financial Times reported that Unicredit and Societe Generale were exploring a merger which many investors hope could pave the way to further consolidation in the sector.

The index, however, pared some gains as analysts noted regulatory obstacles to any deal. SocGen rose 0.7 percent and UniCredit fell 0.8 percent, reversing earlier gains.

"The political and regulatory backdrop remains a significant hurdle to deliver an attractive deal," said Jefferies analysts.

"While the recent political volatility in Italy understandably increases the merger rationale for UniCredit, in our view an outright merger is unlikely in the current circumstances," said KBW banking analyst Jean-Pierre Lambert.

British lender CYBG (Frankfurt: 42YA.F - news) , however, gained 2.2 percent after it upped its offer for challenger bank Virgin Money by 7 percent.

Deutsche Bank (IOB: 0H7D.IL - news) shares rose 1.3 percent in their second day of recovery after they hit a record low on Thursday on a report that the Federal Reserve had deemed its U.S. operations "troubled".

Beyond financials, Air France soared 5.5 percent gain after AccorHotels said it was looking at taking a stake in the airline. Accor (EUREX: 485822.EX - news) fell 6.9 percent on the news.

"While the strategic rationale for Accor is there, we wonder why this cannot be achieved by a commercial partnership without any equity stake," said Bernstein analyst Caius Slater.

He saw little benefit for Air France from a potential deal. Any removal of a French government stake could increase its bargaining power with labour unions, said Slater, but on the other hand the state shareholding was possibly providing a floor to the stock price.

Spain's IBEX rose 1.2 percent after a top aide of new Prime Minister Pedro Sanchez rejected opposition calls for a snap election but Italy's FTSE MIB fell 0.5 percent, reversing earlier gains as initial enthusiasm that the country had avoided a repeat vote faded.

(Reporting by Helen Reid and Danilo Masoni; Editing by Julien Ponthus, Keith Weir and David Stamp)