GLOBAL MARKETS-Monte dei Paschi bolsters European stocks, ECB looms

* Banks lead European shares higher, Wall St seen lower

* Euro edges up vs dollar before ECB meeting

* Aussie dollar falls, stocks rise, after GDP drop

* Oil dips on doubts over impact of OPEC deal

* Graphic: World FX rates in 2016 http://tmsnrt.rs/2egbfVh

By Nigel Stephenson

LONDON, Dec (Shanghai: 600875.SS - news) 7 (Reuters) - European shares followed Asian stocks higher on Wednesday, buoyed by reports that Italy would step in to rescue troubled bank Monte dei Paschi (Milan: BMPS.MI - news) and by expectations the European Central Bank would extend its bond-buying stimulus scheme this week.

Wall Street was set to open slightly lower, according to index futures , as world stocks were on track for their longest winning streak -- three days -- since mid-September.

Italian government bond yields fell, narrowing the premium investors demand to hold them rather than benchmark German debt, to its tightest for about a month.

The pan-European STOXX 600 index rose 0.7 percent and Italy's FTSE MIB share index gained 1.5 percent, hitting its highest for six months.

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Shares (Berlin: DI6.BE - news) in Monte dei Paschi, Italy's oldest bank and the focus of investor concerns over the country's banking sector, rose 9 percent, and an index of Italian lenders' shares rose 5 percent. The STOXX 600 banking index hit its highest since January.

Reuters reported exclusively on Tuesday that Italy was preparing to take a 2-billion-euro controlling stake in the bank as prospects of a private funding rescue faded following Prime Minister Matteo Renzi's decision to resign.

Sources said the government, the bank's largest shareholder would buy junior bonds held by ordinary Italians. Buying the bonds, convertible into shares, would raise the government's stake to 40 percent from 4 percent.

URGENCY

Investors' concerns were that a defeat for Renzi in a referendum on constitutional reforms could further undermine faith in the European Union - following Britain's decision to quit the bloc - as well as confidence in the euro currency.

Market reaction to Renzi's defeat and his resignations was relatively muted, partly as a consequence of a pledge by the ECB to buy Italian government debt if markets became unsettled.

"Despite the fact that the probability of early elections has risen, the market is focusing on the banking sector and the fact the government seems to be showing more urgency in dealing with that problem," Mizuho strategist Antoine Bouvet said.

Italian 10-year government bond yields fell 8 basis points (bps) to 1.90 percent on Wednesday, having hit 2.17 percent in the run-up to the vote. Yields on German 10-year debt, the euro zone benchmark, fell 2.5 bps to 0.35 percent.

The euro edged up 0.2 percent to $1.0733. It fell as low as $1.0505 on Monday in reaction to the referendum before hitting a three-week high the same day.

"People had gone into the referendum with a very pessimistic view and I think the last five years have taught us that, as far as the euro is concerned, political issues often don't have a lasting impact," DZ Bank currency analyst Sonja Marten said.

The dollar index, which measures the U.S. currency against a basket of six of its major peers, was marginally down on the day. The yen fell 0.1 percent to 114.04 per dollar, still close to a 10-month low.

ECB MEETING

Many market participants were looking to the ECB's policy meeting on Thursday, at which it is widely expected to announce an extension of its quantitative easing programme. Uncertainty remains over whether the size of monthly purchases will be kept steady or scaled back, and over whether it will send a formal signal on the eventual end of the programme.

One of the biggest movers in the currency markets was the Australian dollar, down 0.4 percent after data showed the Australian economy shrank by 0.5 percent, its biggest contraction since 2008, in the third quarter.

Australian stocks, however, closed 0.9 percent higher in anticipation of more fiscal and monetary stimulus. While rate futures imply scant chance of a Reserve Bank interest rate cut in the coming months, prospects of a hike vanished.

MSCI (Frankfurt: 3HM.F - news) 's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent while Japan's Nikkei added 0.7 percent. Chinese shares gained 0.7 percent.

China's foreign exchange reserves fell by more than expected last month to $3.05 trillion, their lowest since 2011, the central bank said.

The yuan currency last stood at 6.8850 to the dollar , compared to a mid-point of 6.8808 set by the central bank. The currency is down 5 percent so far this year.

Oil prices fell as investors questioned whether a deal to cut output agreed last week by the Organization of the Petroleum Exporting Countries (OPEC) and others would be enough to drain that global glut that has pushed prices lower.

Brent crude, the international benchmark, fell 52 cents to $53.41 a barrel. (Additional reporting by Hideyuki Sano in Tokyo and John Geddie, Jemima Kelly, Christopher Johnson in London; Editing by Louise Ireland and Gareth Jones)