European shares led lower by Italian political turmoil

* FTSEurofirst 300 falls 0.6 percent

* FTSE MIB (Milan: FTSEMIB.MI - news) drops as Italian government teeters

* Investors nervous over U.S. budget impasse

* European stocks set for best quarter since 2011

By Alistair Smout

LONDON, Sept 30 (Reuters) - A drop in Italian stocks led European shares lower on Monday, after a wave of cabinet resignations from former premier Silvio Berlusconi's party threatened new elections in the euro zone's third biggest economy.

Stocks that are sensitive to optimism about the global economy were also hit as the U.S. government looked set for a shutdown after a political impasse and China reported weaker factory sector growth than last year's flash figures had shown.

Despite the near-term concerns, European shares remained near five-year highs and looked set for their best quarter in two years.

"We need a bit more stability in Italy, but it was a bit of a mess already, so for the region at large the main factor is the situation in the United States," Lucas Roux de Luze, sales trader at TJM Partners, said.

"The market is being hit by this continuous newsflow, but despite this near-term uncertainty, we still think that companies are posting decent results and we could rally into the year-end."

The Italian blue-chip FTSE MIB fell 1.9 percent, the biggest percentage faller among major European bourses and its worst session for six weeks, after Berlusconi withdrew his ministers.

Intesa Sanpaolo (Milan: ISP.MI - news) fell 4.3 percent, the top FTSEurofirst 300 faller, with traders citing the appointment of new CEO Carlo Messia as negative for the stock, potentially signalling the advent of risky merger activity for the bank.

Telecom Italia (Milan: TIT.MI - news) was the only Italian blue chip in positive territory, up 3.3 percent and the Eurofirst's top riser, after reports that its own CEO was set to resign on Thursday, with the stock also benefiting from an upgrade by JP Morgan (Other OTC: MGHL - news) .

The pan-European FTSEurofirst 300 was down 0.6 percent at 1,246.82 at 0730 GMT, with financials, basic materials and industrials taking the most points off of the index.

Every major European index was in negative territory as political deadlock in the United States threatened federal government shutdown, ahead of a debt ceiling deadline in October.

Chances that Republicans and Democrats could reach a deal on funding the government for the new fiscal year before midnight on Monday seemed increasingly thin. On Sunday, the Republican-controlled House of Representatives passed a measure tying government funding to a delay of a healthcare restructuring law, which Senate Democrats have vowed to reject.

Jitters over the political situation have taken the wind out of a recent equity rally after the U.S. Federal Reserve maintained its stimulus at the current pace, and EPFR fund flow data showed that equity funds posted $1.54 billion in outflows last week.

The rally still leaves the FTSEurofirst near five-year highs, and it currently trades up 4 percent for September, and 8 percent higher in the quarter, set for its best quarter since 2011.

"We believe that there is a strong fundamental case for European equities, driven by improving economic growth, high operational gearing and reasonable valuation," analysts at Goldman Sachs (NYSE: GS-PB - news) said in a note.