European shares rise as Italy bank rally powers sector

(ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets) Adds details, closing prices)

* STOXX Europe 600 index ends up 1 pct

* Italian banks up 9 percent

* Drax leads utilities firms higher

* UK spreadbetters slump as regulator toughens rules

By Danilo Masoni and Atul Prakash

MILAN/London, Dec (Shanghai: 600875.SS - news) 6 (Reuters) - European shares rose on Tuesday for a second day with banking stocks surging to an 11-month high as investors dipped back into a beaten-down sector following Italy's constitutional referendum on the weekend.

The rally was led by Italian banks, which climbed 9 percent, their biggest one-day since July, on short covering before a European Central Bank meeting this week and after Italian Prime Minister Matteo Renzi said he would step down following the referendum's defeat.

"No one held Italian banks before the referendum. It's a matter of positioning and investors are now covering short positions," said Anthilia Chief Investment Officer Andrea Cuturi. He said European banks were supported by a continued rotation into cyclical stocks.

Italy's banking index has lost half its value so far this year on worries over political instability and how to its handle bad debt. Monte dei Paschi (Milan: BMPS.MI - news) rose 1.2 percent on expectations of a state bailout of the troubled lender.

"A clean and swift solution to Monte dei Paschi, even involving state aid, could help remove an impediment to Italian bank valuations, which have cheapened in anticipation of a 'No' outcome from the referendum," Barclays (LSE: BARC.L - news) said in a note.

Two sources with knowledge of the matter said the Italian treasury was considering raising its stake in Monte Paschi to help it remain in business by buying out retail investors who own subordinated debt.

Europe's bank sector index rose 4.4 percent to its highest level since Jan. 14. Gains in banks helped the pan-European STOXX 600 index end up 1 percent.

The utilities sector was also in demand after British power producer Drax Group Plc (Frankfurt: D9F2.F - news) announced it plans to buy energy supplier Opus Energy and four gas power plant projects. Drax ended up 12 percent.

Jefferies analyst Oliver Salvesen said Drax's plan would help it shift from its existing commodity-exposed business towards a more diversified model and expand its customer base .

The STOXX Europe 600 Utilities index climbed 2.7 percent higher.

Among mid-caps, Britain's spreadbetting firms CMC Markets (LSE: CMCX.L - news) and IG (Frankfurt: A0EARV - news) both slumped over 37 percent after Britain's financial watchdog proposed stricter rules for "contract for difference" products.

Gains in the broader European stock market were capped by a fall in commodities-related stocks.

The STOXX Europe 600 Basic Resources (Frankfurt: W8Z.F - news) index dropped 1 percent, the biggest decline by a sector, after prices of major industrial metals such as copper, aluminum and zinc fell. Energy shares also underperformed, with the regional oil and gas index ending flat after crude oil prices fell. (Reporting by Danilo Masoni, editing by Larry King)