European shares lifted by surge in Italian banks

* Rise in bank stocks lifts European stock markets

* Monte dei Paschi (Milan: BMPS.MI - news) surges on report of rescue plan

By Sudip Kar-Gupta

LONDON, March 14 (Reuters) - European shares rose on Monday as funding plans from the European Central Bank for the region's lenders buoyed markets, while Italian banking stocks surged on the prospect of a possible rescue deal.

The pan-European FTSEurofirst 300 index, which had climbed 2.7 percent on Friday, was up 1 percent while the euro zone's blue-chip Euro STOXX 50 index also advanced 1.2 percent.

Germany's DAX also rose 1.9 percent to climb back over the 10,000 points mark - a key level for many technical traders - for the first time since January.

Analysts said euro zone banks in the so-called "peripheral" nations of Italy, Spain and Portugal were continuing to rally on the ECB's plans for a new round of cheap funding for the sector.

"We believe there is enough value in the sector for continued performance on central bank stimulus - with peripheral banks likely to lead the way," said RBC Europe analyst Robert Noble.

Shares (Berlin: DI6.BE - news) in Italian bank Monte dei Paschi di Siena rose more than 10 percent, with traders citing speculation that state holding Cassa Depositi e Prestiti (CDP) might intervene in a government-sponsored rescue of the troubled Italian bank.

A report in la Repubblica newspaper said that Prime Minister Matteo Renzi had put out feelers with CDP and Intesa Sanpaolo (Amsterdam: IO6.AS - news) to see whether they might be willing to step in. It said a rescue deal could also involve banking foundations.

Intesa was up 1.2 percent while other Italian banks, such as Carige, also advanced.

Shares in German carmaker BMW (Swiss: BMW.SW - news) also rose after brokerage Kepler Cheuvreux raised its rating on the stock to "hold" from "reduce".

In spite of the rebound from the end of last week, the FTSEurofirst remains down by around 5 percent since the start of 2016, with world stock markets having been impacted by concerns about a global economic slowdown.

Some investors and strategists, such as Wall Street bank Morgan Stanley (Xetra: 885836 - news) , remained cautious.

The euro zone's uncertain political and economic backdrop was also highlighted by a defeat for German Chancellor Angela Merkel in regional elections over the weekend.

"Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities, and to moderate our EU credit weight after the sharp ECB driven rally," said Morgan Stanley's strategists.

Today's European research round-up (Additional reporting by Francesca Landini; Editing by Toby Chopra)