GLOBAL MARKETS-Euro jumps as investors bet on Italian political limbo, not turmoil

* Italy PM Renzi to quit after heavy referendum defeat

* Europe shrugs off poll, but Italian assets under pressure

* Brexit in the dock

By Jamie McGeever

LONDON, Dec (Shanghai: 600875.SS - news) 5 (Reuters) - European stocks and the euro rose on Monday, battling back as investors bet that Prime Minister Matteo Renzi's resignation after voters rejected his constitutional reforms would not trigger a snap election in Italy.

Italian stocks broadly languished below the water line but the losses seen as the scale of Renzi's defeat in Sunday's referendum emerged were more than halved.

But there was no relief for Italian bonds or banks, which bore the brunt of investor fears that a fresh bout of political turmoil in the euro zone's third-largest economy, and one of its most indebted, could undermine Italy's shaky banking system.

U.S. futures took their cue from the generally positive tone across the rest of Europe and pointed to a rise of about 0.4 percent at the open on Wall Street.

"Renzi's resignation is likely to lead to a period of higher political uncertainty which comes in the midst of ongoing recapitalisation efforts in the Italian banking sector," said Nicola Mai, head of European sovereign credit research at PIMCO.

"Negative market sentiment on the vote is likely to be mitigated by the fact that the market has been expecting a 'No' (vote) and that the ECB remains in play in European sovereign bond markets."

The euro hit a 20-month low of $1.0508 but roared back two full cents, to above $1.07 for the first time in more than two weeks.

Milan's main bourse fell 2 percent at the opening but was last down 0.6 percent. Italian financials shed more than 3 percent as a 5 billion euro rescue plan for Monte dei Paschi (Milan: BMPS.MI - news) di Siena hung by a thread.

Europe's FTSEuroFirst index of leading 300 shares rose 0.8 percent and Germany's DAX rose 1.5 percent.

The referendum outcome was anticipated but the crushing margin of Renzi's defeat - 59 percent to 41 percent - caused the initial alarm.

It also deals a blow to the European Union, which is already reeling from multiple crises and rising anti-establishment sentiment of the kind that led to Britain's shock vote to quit the bloc in June.

Italy's benchmark 10-year bond yield jumped 13 basis points to 2.03 percent, widening the premium investors demand for holding Italian bonds over safer German bonds to 175 bps, before easing slightly.

The strong link between Italy's banking sector and bond market is a major concern for investors. Banks have been hit by concerns over their huge exposure to bad loans built up during years of economic downturn. They also hold large amounts of Italian government debt.

BREXIT IN THE DOCK

Markets had earlier taken some encouragement from the sound defeat in Austria's presidential election of a far-right candidate by a pro-European, which confounding forecasts of a tight race.

The European Central Bank meets on Thursday amid much speculation it will announce a six-month extension of its asset buying programme and widen the type of bonds it can purchase.

Earlier in Asia, MSCI (Frankfurt: 3HM.F - news) 's broadest index of Asia-Pacific shares outside Japan eased 0.4 percent and Japan's Nikkei closed down 0.8 percent.

China's CSI (Shanghai: 600158.SS - news) 300 index tumbled 1.7 percent and Hong Kong's Hang Seng index retreated 0.7 percent after U.S. President-elect Donald Trump took to Twitter (Frankfurt: A1W6XZ - news) to complain about Chinese economic and military policy.

Wall Street ended Friday on a cautious note, with the Dow off 0.11 percent, while the S&P 500 rose 0.04 percent and the Nasdaq (Frankfurt: 813516 - news) gained 0.09 percent.

While the U.S. November payroll report on Friday was firm enough to cement expectations of a U.S. interest rate hike by the Federal Reserve this month, a surprise pullback in wages helped bonds pare a little of their recent losses.

In currencies, the dollar was supported by expectations of a U.S. rate increase this month and more to come next year. The dollar index,, which tracks the greenback against a basket of six global peers, was up 0.2 percent at 100.95.

Against the yen, the dollar rose 0.7 percent to 114.30 yen .

The New Zealand dollar NZD=, which earlier weakened almost 1 percent to $0.707 after Prime Minister John Key unexpectedly announced his resignation, recovered a little to trade down 0.5 percent at $0.7090.

New Zealand stocks ended the day 0.7 percent lower.

Sterling could be vulnerable to developments in Britain's Supreme Court on Monday, as judges hear the government's appeal against a ruling that the formal process of Brexit cannot begin without parliamentary approval.

The pound was last unchanged at $1.2715, having risen to a multi-month high on Thursday on indications from a leading government minister that a "soft Brexit" might be the outcome rather than a "hard Brexit".

"If the government loses its appeal, we could see another leg higher in sterling against the dollar," City Index research director Kathleen Brooks said.

In commodity markets, Brent crude's rally in the wake of last week's historic OPEC production cut continued. It rose above $55 a barrel for the first time since July last year.

(Reporting by Jamie McGeever; Editing by Catherine Evans)