European stocks fall on Greek and Spanish political concerns

* Greece's ATG index falls on renewed debt default worries

* Spanish stock market drops after local election results

* Volumes thin with London, Frankfurt and New York closed

* Monte Paschi shares rise after launching new rights issue

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

By Sudip Kar-Gupta

LONDON, May 25 (Reuters) - European shares fell on Monday, with the Spanish and Greek stock markets hit by investors' concerns over Greece's debt problems and a poor local election result for the government in Madrid.

Athens' main ATG equity index fell 3.1 percent as the Greek government said on Monday that it intended to make good on its debt obligations but urgently needed aid to be able to do so. The ATG is down by around 1.5 percent since the start of 2015, underperforming other European stock markets.

The Greek government's comments came as several senior officials insisted Athens had no money to pay a loan installment due next week.

Spain's IBEX equity index fell 2 percent after the ruling People's Party took a battering in regional and local elections on Sunday. Voters punished Prime Minister Mariano Rajoy for four years of severe spending cuts and a string of corruption scandals.

Most investors expect Greece to remain in the euro zone, and record low interest rates and other economic stimulus measures from the European Central Bank have enabled European stock markets to rally this year, despite the Greek uncertainty.

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

"There is no doubting that Greece has become a frequent recurring risk to investor sentiment in recent months, and there is potential for investor sentiment to be pulled down even further by the news that anti-austerity parties were declared victorious in several local elections in Spain," said FXTM analyst Jameel Ahmad.

The pullback in European stocks mirrored losses on Wall Street on Friday after U.S. Federal Reserve Chair Janet Yellen hinted at a possible rate hike this year.

France's CAC-40 stock index dropped 0.5 percent while Italy's FTSE MIB fell 2.1 percent, impacted by a drop in the shares of Fiat Chrysler Automobiles.

Fiat declined 3.1 percent after the New York Times reported that the company's Chief Executive Sergio Marchionne sent an email to General Motors (NYSE: GM - news) ' Chief Executive Officer Mary Barra in March suggesting combining the automakers, but was rebuffed.

However, shares in Italian bank Monte Paschi surged 11.3 percent after the lender launched its second rights issue in less than a year to repair its balance sheet.

Trading volumes were thin with the London, Frankfurt and New (KOSDAQ: 160550.KQ - news) York stock markets shut for public holidays. (Additional reporting by Atul Prakash; Editing by Catherine Evans and Susan Fenton)