Italy, Spain lead stock higher on ECB stimulus bet

* FTSEurofirst 300 up 0.4 pct, Euro STOXX 50 up 0.5 pct

* Italy, Spain lead rally as investor bet on ECB stimulus

* Austrian banks in relief rally as Ukraine tensions seen easing

By Francesco Canepa

LONDON, March 6 (Reuters) - Italian and Spanish shares led European bourses higher on Thursday as investors bet the European Central Bank would act to stimulate the region's economy and diplomatic efforts would moderate the Ukraine crisis.

Banks in Spain and Italy, two economies which are suffering from still subdued economic activity and inflation, led a rally in the Euro STOXX banking index on speculation the ECB's President Mario Draghi may take action to loosen lending conditions.

Italy's FTSE MIB was up 0.8 percent after briefly hitting a high not seen since June 2011 while Spain's Ibex 35 was up 1.1 percent, making the two indexes the best performers among their European peers.

Traders speculated the ECB, due to hold its monthly policy meeting on Thursday, may take its deposit rate into negative territory to stimulate lending. An ECB source told Reuters earlier this week the bank would end the so-called sterilisation of the bond purchases under the bank's Securities Markets Programme (SMP).

"Some people think he'll cut rates...and that's why the market is ticking up," Mike Reuter, a broker at Tradition, said. "If nothing happens at all the market is going to be disappointed. On a morning like this I'd take profit and wait."

Italy's FTSE MIB has risen nearly 6 percent over the past three days, also helped by some better-than-expected data on Wednesday, which was making some traders sceptical about imminent ECB action.

"I don't think Draghi will do anything today," said Markus Huber, a senior trader at Peregrine & Black.

"What's more important is that he reiterates that if anything needs to be done to stimulate inflation he'll be ready to act. If we have a strong statement like that I think the market will be okay."

Banks exposed to Ukraine, such as Austria's Raiffeisen Bank International and Erste Bank (Other OTC: EBKDY - news) , also rallied as U.S. Secretary of State John Kerry said he expected to meet Russian Foreign Minister Sergei Lavrov again on Thursday.

While talks so far made little apparent headway, traders were comforted by the fact conversations were continuing, which they interpreted as a sign imminent military action was less likely.

At 1135 GMT, the FTSEurofirst 300 index of top European shares was up 0.4 percent at 1,348.63 points and the Euro STOXX 50 was up 0.5 percent at 3,151.04 points.

Germany's Merck KGaA (Other OTC: MKGAF - news) , down 4.7 percent, was the top faller on the FTSEurofirst 300 as the pharma and liquid-crystals group disappointed investors with a conservative earnings outlook for 2014.

"It is obviously a negative but I think the long-term value case is still there," said Chris Hiorns, who owns the stock among the top holdings of Ecclesiastical's Amity European Fund.

"I'm not surprised the shares have moved off a bit but on the whole we're still positive on the pharma sector (because) these companies have strong cashflow and good balance sheets."

Shares in French telecom group Orange (Other OTC: FNCTF - news) rose 8.5 percent after the company posted a positive profit outlook, while Deutsche Telekom (Xetra: DTE.DE - news) fell 3.8 percent after scrapping its forecast for free cash flow in 2015.

Europe bourses in 2014:

Asset performance in 2014:

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