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Italian stocks underperform Europe as election worries bite

Reuters - UK Focus

* STOXX up 0.1 pct at close

* Milan falls 1.6 pct on snap election worries

* Trump's Iran decision scheduled after close

* Rise in M&A deals continues

* Earnings disappointments prompt share drops (Adds detail, updates prices at close)

By Julien Ponthus and Danilo Masoni

LONDON/MILAN, May 8 (Reuters) - Italian stocks were a weak spot in the broader European market on Tuesday as the threat of a snap election grew, while earnings and deal-making sparked some large individual moves elsewhere.

The pan-European STOXX 600 index ended 0.1 percent higher after spending most of the day in negative territory. Italy's FTSE MIB closed 1.6 percent lower amid worries about political turmoil in the euro zone's third-largest economy.

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Italian banks took the most off the index, losing 2.1 percent. State-controlled oil major Eni (LSE: 0N9S.L - news) was down 2.6 percent.

"It's not a good day for Italian assets. Markets are starting to feel the pressure of elections," said Carlo Franchini, head of institutional clients at Italy's Banca Ifigest.

President Sergio Mattarella called on Monday for Italy's bickering parties to rally behind a "neutral government." Italy's two largest parties, the far-right League and anti-establishment 5-Star Movement, opposed that idea, raising the likelihood of an immediate return to the polls.

The Italian stock market has outperformed its European peers this year, but a number of analysts warned that political risk was not priced into the market. On Monday, the FTSE MIB ended at its highest since October 2009.

Elsewhere in Europe, first-quarter corporate earnings and mergers and acquisitions prompted sharp individual price moves while investors prepared for Donald Trump's decision on whether to withdraw the U.S. from the Iran nuclear agreement.

The announcement is expected after the market close and could disrupt global oil supplies. The price of crude is near its highest in more than three years.

Shares (Berlin: DI6.BE - news) in Danish hearing aid maker William Demant (LSE: 0RGT.L - news) were the worst performers of the STOXX, falling 9.5 percent after warning that lower demand would weigh on sales .

German postal and logistics group Deutsche Post DHL missed first-quarter profit expectations and saw its shares fall 7 percent.

Earnings also missed forecasts at staffing group Adecco (Swiss: ADEN.VX - news) , and its shares fell 5.1 percent.

Unilever (NYSE: UL - news) , however, advanced 1.8 percent as it announced a 6 billion-euro share buyback.

In London, mergers and acquisitions helped the FTSE close flat in percentage terms.

Shire (Xetra: S7E.DE - news) rose 4.6 percent after Takeda Pharmaceutical said it agreed to buy the group for 45.3 billion pounds ($61.50 billion).

Shares in Virgin Money jumped nearly 10 percent after the British bank said it had received an all-share takeover offer by rival CYBG (Frankfurt: 42YA.F - news) , valuing it at about 1.6 billion pounds. (Reporting by Julien Ponthus and Kit Rees, editing by Larry King)