European shares extend gains on speculation of ECB action

* FTSEurofirst 300 gains 0.5 pct, hits 3-week high

* Euro zone's Euro STOXX 50 index sets 5-1/2-year peak

* Focus on euro zone inflation data at 0900 GMT

* Miners top sectoral gainers, Italian banks rally

By Atul Prakash

LONDON, March 31 (Reuters) - European equities rose for a fifth straight session to a three-week high on Monday on growing speculation that the European Central Bank could ease its policy and China might take steps to stimulate its economy.

At 0738 GMT, the FTSEurofirst 300 index was up 0.5 percent at 1,339.42 points after touching 1,340.73, the highest since early March. The euro zone's blue-chip Euro STOXX 50 rose 0.3 percent to a 5-1/2-year high of 3,185.67.

Italian banks rallied after the head of Italy's banking association said they will not require any state funds as a result of the ECB's stress tests this year.

Investors awaited the euro zone inflation data, due at 0900 GMT. A surprise fall in inflation for Spain and Germany on Friday raised pressure on the European Central Bank (ECB) to take additional measures at a policy meeting on Thursday to ward off the threat of deflation.

Annual inflation in the euro zone has been in what ECB President Mario Draghi has called the "danger zone" below 1 percent for five months.

"The mood remains positive on equity markets as commodity prices are rising again and geopolitical tensions take a back seat. This is a good foundation to start a new week and the chance for new yearly highs this week," Christian Stocker, strategist at UniCredit (Berlin: CRIH.BE - news) in Munich, said.

"The second half of the week is more interesting as we have a monthly policy meeting of the ECB and the U.S. labor market report. The euro zone's inflation is expected to fall again and this could fuel expectations that the ECB will decide on some kind of quantitative easing later."

Among major sectoral movers, miners topped the gainers' list, with the STOXX Europe 600 Basic Resources (Frankfurt: W8Z.F - news) index rising 1.3 percent on speculation of fresh stimulus measures in China, the world's biggest metals consumer.

Chinese Premier Li Keqiang sought to reassure markets that Beijing was ready to support the cooling economy, saying the government had the necessary policies in place and would push ahead with infrastructure investment.

Italian banks led financial stocks higher on news that they will not require any state funds. Shares in Monte dei Paschi (Milan: BMPS.MI - news) di Siena, Intesa Sanpaolo (Frankfurt: IES.F - news) and UniCredit rose 0.8 to 3.6 percent.

Banco Popolare (Dusseldorf: B8Z.DU - news) gained 3.5 percent, the first day of a 1.5 billion euro ($2.06 billion) capital increase which according to the Italian press has attracted interest from international investors.

Analysts said the market's outlook remained positive and key indexes, such as the Euro STOXX 50, could set new highs in the medium term. The blue-chip index's 5-1/2-year high on Monday is about 7 percent higher since a low hit in mid-March.

"The buying pressure is intensifying, and the momentum is strongly bullish," Aurel BGC chartist Gerard Sagnier said, adding the index's next target would be to reach 3,400 points.

Europe bourses in 2014: http://link.reuters.com/pap87v

Asset performance in 2014: http://link.reuters.com/gap87v

Today's European research round-up

(Additional reporting by Blaise Robinson in Paris. Editing by Jane Merriman)