Germany underperforms rival European stock markets as VW slumps

* Slump in Volkswagen pushes down Germany's DAX

* FTSEurofirst 300 up 0.6 pct, Euro STOXX 50 up 0.4 pct

* Dialog down 21 pct after deal to buy Atmel

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

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

By Sudip Kar-Gupta and Danilo Masoni

LONDON/MILAN, Sept 21 (Reuters) - European shares rebounded on Monday, buoyed by stronger bank and chemical stocks, although a slump in carmaker Volkswagen hit the German market.

Volkswagen shares lost one fifth of their value after Europe's largest carmaker told U.S. dealers to halt sales of some 2015 diesel cars because regulators had found software designed for the affected vehicles giving false emissions data.

Volkswagen launched an investigation into the matter and could face penalties of up to $18 billion, the U.S. Environmental Protection Agency (EPA) said.

"The commencement of legal proceedings against VW by the U.S. EPA is profoundly serious," Bernstein analysts wrote in a note.

The drop in Volkswagen affected other auto stocks, with BMW and Daimler down over 3 percent, while Germany's DAX fell 0.7 percent to its lowest since end-August when global markets were hit by a rout in China.

The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index were up 0.6 percent and 0.4 percent respectively.

Traders said European equities were rebounding from last week's losses triggered by the U.S. Federal Reserve's downbeat comments about the global economy. Sentiment on Monday was helped by Sunday's clear election outcome in Greece.

The broader European equity markets were steadied by firmer banking, chemical shares and luxury shares.

Spanish bank Santander rose 0.5 percent after Citigroup upgraded the stock to "buy" from "neutral".

Bayer advanced 1.8 percent after the chemicals company's plastics division Covestro said it aimed to raise about 2.5 billion euros in an initial public offering.

But Dialog Semiconductor fell 21 percent after the microchips maker agreed to buy U.S. peer Atmel for $4.6 billion.

Some investors remained concerned by an economic slowdown in China, but others said such worries were exaggerated.

"We believe sentiment is too bearish regarding near-term Chinese growth momentum. Infrastructure orders are likely to pick up to meet budget shortfalls that were made during the first half. We note Chinese house prices are now up for four months in a row," JP Morgan equity strategist Mislav Matejka said.

Greece's stock market edged down 0.4 percent after the leftist Syriza party's election victory, with yields on government paper edged lower. Investors' focus turned from the election to the formation of the new cabinet and the implementation of the country's third bailout.

The main Athens equity index ATG is down nearly 20 percent since the start of 2015, underperforming a 3 percent gain on the FTSEurofirst.

Today's European research round-up (Editing by Mark Heinrich)