Dialog Semi slump, banks weigh on European shares; volatility up

* STOXX 600 ends little changed

* Apple (NasdaqGS: AAPL - news) worries smash Dialog, but big banks play down risks

* Volatility index rises to more than 1-month high

* Alstom (LSE: 0J2R.L - news) hit after reports of rival rail merger talks

* Autogrill (Milan: AGL.MI - news) rallies as spin-off move fuels M&A chatter (Adds details, closing prices)

By Kit Rees and Danilo Masoni

LONDON, April 11 (Reuters) - A sharp drop in shares of Apple-supplier Dialog Semiconductor (LSE: 0OLN.L - news) dominated trading in otherwise muted European stock markets on Tuesday as a shortened week and risk-off sentiment kept investors from making big bets.

The pan-European STOXX 600 ended flat as gains in the luxury goods sectors offset weakness in chipmakers and financials. Better-than-expected quarterly sales at LVMH lifted shares of the world's largest luxury goods maker to a record high.

European shares have been treading water in recent sessions, with the benchmark index little changed so far this month on mounting political tensions in the Middle East and North Korea, above-average valuations and caution ahead of earnings season.

Expectations that European stocks might see bigger swings in the short term rose to their highest since end-February, following a similar spike in volatility on Wall Street overnight.

On the day, tech stocks were the worst sectoral performers, with a sub-index tracking top European tech firms down 1.2 percent. Losses were led by Dialog Semiconductor, which lost 14 percent after a German broker said the company risks losing business from Apple.

Broker Bankhaus Lampe cut its rating on the chipmaker to "sell" from "buy", warning that Apple could be developing its own PMIC (power management integrated circuit). Dialog Semiconductor supplies power management chips to Apple.

"We hear from the industry that about 80 engineers at Apple (Swiss: AAPL-EUR.SW - news) are already working on a PMIC with specific plans to employ it in the iPhone by as early as 2019," analysts at Bankhaus Lampe said in a note.

Dialog sharespared some losses as big banks including Barclays (LSE: BARC.L - news) , Morgan Stanley (Xetra: 885836 - news) and BofA-ML cast doubts on views that the firm risked losing business from Apple and called the share slide an over-reaction. Dialog had lost one-third of its market value at one point.

Last week, shares in Imagination Technologies (Other OTC: IGNMF - news) lost two-thirds of their value after Apple, its biggest customer, said that it would stop using Imagination's graphics technology.

"(Dialog Semiconductor) could potentially go the same way as Imagination Technologies has recently. It just shows the risks associated with companies being very reliant on one key contract," Dafydd Davies, partner at Charles Hanover Investments, said.

Industry peer AMS (IOB: 0QWC.IL - news) also came under pressure after UBS cut its rating to "neutral" from "buy", sending the stock down 9.5 percent, while STMicroelectronics (LSE: 0INB.L - news) fell 3.6 percent.

Elsewhere, share price moves were driven by dealmaking expectations.

French rail equipment maker Alstom fell 2.7 percent on reports that rivals Siemens (BSE: SIEMENS.BO - news) and Bombardier (Swiss: BBDB.SW - news) were in talks to combine their rail operations.

Italian restaurants firm Autogrill surged 8.2 percent to a record high after news that it plans to separate its food and beverage business fueled speculation of possible merger and acquisition activity.

Banking stocks dropped 0.7 percent, with Banco Popular (NasdaqGS: BPOP - news) the biggest loser, down 9.7 percent and hitting fresh record lows. On Monday, the bank said that it was considering another capital hike to clean up its balance sheet and would consider a merger deal. (Reporting by Kit Rees and Danilo Masoni; Editing by Tom Heneghan)