European shares set to extend two-week rally, led by Italy

* FTSEurofirst 300 up 0.4 pct

* China investment promise boosts basic resources

* Italy shines; FTSE MIB at highest since May 2011

* Insurers suffer from threat of investigation (Adds detail, quote, updates prices)

By Alistair Smout

LONDON, March 28 (Reuters) - European shares rose on Friday and looked set to gain for a second straight week after basic resources stocks got a boost from China. Italian stocks continued to outperform.

The pan-European FTSEurofirst 300 was up 0.4 percent at 1,327.64 at 1130 GMT, 1.6 percent higher on the week.

The rise took gains over the last fortnight to 3.4 percent, but the index remains 1.8 percent below the 5 1/2-year high it reached in February. It fell 1.6 percent in March amid concerns about Ukraine, slower Chinese growth and the possibility U.S. interest rates will rise sooner than expected.

However, recent weakness in China led Chinese Premier Li Keqiang to say Beijing was ready to support the cooling economy and would push ahead with infrastructure investment. That helped the STOXX Europe 600 Basic Resources (Frankfurt: W8Z.F - news) Index to climb 1.1 percent, making the sector one of the biggest risers in Europe.

"We're making a little bit of a jolt higher, based on hopes of some form of Chinese fiscal stimulus, but that's not the big game in town," said Jeremy Batstone-Carr, an analyst at Charles Stanley (Shenzhen: 002588.SZ - news) . "The big question for China is whether it can deflate its credit bubble without creating a burst. The bounce we're seeing today is a short-term effect."

Volatility on the Euro STOXX 50, a crude gauge of investor fear, has dropped by a quarter over the last weeks, indicating that investors are becoming more relaxed about the issues that have undercut stock returns so far this month.

Much of the volatility has been caused by Russia's annexation of Crimea from Ukraine, which has hit stocks exposed to the Russian economy and potentially detrimental sanctions.

Austrian bank Raiffeisen, which derives over 20 percent of its revenues from Russia, nevertheless rose 3 percent on Friday.

Italian stocks outperformed again, leaving the FTSE MIB up 13 percent, ahead of the major indexes in France, Germany, Spain and Britain.

The index gained 1.2 percent to hit its highest since May 2011, led up by its banks, as Italian bond yields fell to an 8 1/2-year low.

Intesa Sanpaolo (Frankfurt: IES.F - news) gained 4.3 percent, the top riser on the FTSEurofirst 300, after it said it was on course to rebuild profits and offered a generous dividend policy.

"The signs of a broad-based recovery are now evident in Italy, too, but levels of activity and employment are still well below previous peaks," Credit Suisse (NYSE: CS - news) said in a note. "Debt dynamics are moving in the right direction, provided growth - the overriding problem of the country - does come back."

Insurers were the only sector in negative territory. Aviva (Other OTC: AIVAF - news) , Legal & General (LSE: LGEN.L - news) , Standard Life (LSE: SL.L - news) and Prudential (HKSE: 2378.HK - news) all fell between 2 and 7 percent.

Traders pointed to reports saying a UK regulator is to investigate about 30 million insurance company policies over concerns that customers are subject to "unfair" conditions.

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

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

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