Telecom stocks rally in quiet European markets on M&A talk
* Pan-European STOXX 600 index ends little changed
* Deutsche Telekom (IOB: 0MPH.IL - news) lifts sectoral index to 4-week high
* All eyes on two-day Federal Reserve meeting
* Heineken (LSE: 0O26.L - news) drops as Mexican investor cuts stake (Recasts, adds details, closing prices)
By Danilo Masoni and Julien Ponthus
MILAN, Sept 19 (Reuters) - Dealmaking talk lifted European telecom stocks on Tuesday, helping the unloved sector stand out in an otherwise quiet session, where investors were waiting for the outcome of a Federal Reserve meeting.
The pan-European STOXX 600 index ended flat as traders awaited clues from the Fed about plans to start unwinding its $4.2-trillion portfolio of Treasuries and mortgage-backed securities.
"As the FOMC (Federal Open Market Committee) convenes and starts its two-day meeting, markets will probably remain somewhat muted – awaiting tomorrow’s (Wednesday's) decision", Rabobank analysts said in a note.
But telecoms stocks rose as much as 0.9 percent to their highest level in nearly four weeks after CNBC reported that U.S. wireless carriers T-Mobile US Inc and Sprint Corp were in active merger talks.
Deutsche Telekom, which controls T-Mobile US, was the biggest gainer, up more than 3 percent, but other stocks in the sector were also boosted by the report.
A trader at a European bank said Deutsche Telekom was the "obvious beneficiary" of any T-Mobile US-Sprint talks even though any combination would face serious anti-trust hurdles.
European telecoms stocks have underperformed the broader market in the past two years but valuations and earnings potential have started to fuel investors' interest.
Deutsche Bank (IOB: 0H7D.IL - news) analysts led by Robert Grindle said this week a recovery of telecom stocks was long overdue and recommended that investors take positions as any rally could be swift.
Their top picks in the sector included Telenet (LSE: 0GAF.L - news) , Telefonica (LSE: 826858.L - news) , Vodafone and KPN (Amsterdam: KPN.AS - news) .
Still on the M&A front, Eurofins got a boost from the acquisition of EAG Laboratories in North America. It was up more than 6 percent, making it the biggest gainer on the STOXX.
Solvay (LSE: 0NZR.L - news) fell 1.4 percent but stayed close to its 2015 highs after news of the 1.6 billion-euro sale of its polyamides business to BASF.
Clariant (IOB: 0QJS.IL - news) fell 0.5 percent as news emerged the hedge funds fighting the Swiss chemical firm's planned $20 billion merger with Huntsman Corp built a 15.1 percent stake.
Elsewhere, Heineken fell 4.4 percent after Mexican bottler and retailer Femsa sold a 2.5 billion-euro stake in the world's second largest brewer.
Ocado declined 1.9 percent after the British online grocer reported third-quarter results, saying short-term costs could increase due to investment in a new distribution centre.
(Reporting by Danilo Masoni. Editing by Jane Merriman)