European shares stumble on Spanish and Greek worries

* Government defeat in local election impacts Spanish stocks

* Ryanair shares rise after airline's profits surge

* Europe bourses in 2015: http://link.reuters.com/pap87v

* Asset performance in 2015: http://link.reuters.com/gap87v

By Sudip Kar-Gupta

LONDON, May 26 (Reuters) - European stock markets stumbled on Tuesday as Greece's debt problems and a battering for Spain's government in local elections offset a rise in airline shares.

The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index fell 0.8 percent and 1 percent respectively. The FTSEurofirst remains up nearly 20 percent since the start of 2015.

Irish airline Ryanair surged 5.4 percent after posting higher profits. Its rival Aer Lingus (Other OTC: AELGF - news) also rose after Ireland (Other OTC: IRLD - news) 's prime minister said the government would discuss the sale of its stake in the airline.

However, Spanish banking stocks underperformed.

Popular (NasdaqGS: BPOP - news) , Sabadell and Caixabank (Other OTC: CAIXY - news) all fell after Spain's ruling PP party suffered its worst defeat in over 20 years in local elections, reflecting voter discontent at four years of austerity.

Although the weekend's election result had already hit Spanish stocks on Monday, trading had been thin on that day since markets in London, Frankfurt and New York were shut for public holidays.

Spain's benchmark IBEX index retreated a further 0.7 percent on Tuesday, with the market at one stage suffering its worst two-day fall in around five weeks.

Greece's main ATG equity index recovered slightly from a 3.1 percent fall on Monday to rise 1.1 percent, but the index has made zero gains since the start of 2015, underperforming rallies on other European stock markets.

Greece and its Europeans creditors on Tuesday sought to play down fears that Athens would default on a payment to the International Monetary Fund next week.

Lacking cash to pay public sector salaries, pensions and debt obligations, senior members of Prime Minister Alexis Tsipras's government have said openly that Greece does not have the money to pay 300 million euros to the IMF on June 5.

"I think an element of default from Greece is being factored into the marketplace," said Mike Turner, European equity options broker at XBZ Ltd.

Most investors expect Greece to remain within the euro zone even if it misses some payments.

Record (LSE: REC.L - news) low interest rates and other economic stimulus measures from the European Central Bank have also enabled European stocks to rally this year, despite the Greek problems.

Nevertheless, traders said the latest developments from Athens and Madrid made some investors wary.

"We are a bit in no-man's land at the moment," said Mirabaud Securities' senior equity sales trader John Plassard.

Shares (Berlin: DI6.BE - news) in telecoms group Altice fell after its bid rival Charter Communications (NasdaqGS: CHTR - news) , controlled by cable industry pioneer John Malone, offered to buy Time Warner Cable (Xetra: T3W1.DE - news) for $56 billion.

Monte dei Paschi (Milan: BMPS.MI - news) di Siena also slumped following the Italian bank's 3-billion euro cash call.

Today's European research round-up (Additional reporting by Lionel Laurent; Editing by Mark Trevelyan)