Italy, Spain lead stock rally on ECB stimulus bet

* FTSEurofirst 300 up 0.5 pct, Euro STOXX 50 0.7 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 fragile economic activity and subdued inflation, led a rally in the Euro STOXX banking index on speculation the ECB may take action to loosen lending conditions.

Italy's FTSE MIB, up 1 percent, hit a high not seen since June 2011 while Spain's Ibex 35 was up 0.9 percent, making them the best performers among major European indexes.

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

"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."

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 idea conversations were continuing, which they interepreted as a sign imminent military action was less likely.

At 0908 GMT, the FTSEurofirst 300 index of top European shares was up 0.5 percent at 1,350.89 points and the Euro STOXX 50 was up 0.7 percent at 3,157.17 points.

Investors were also combing through a raft of corporate results.

Shares in French telecom group Orange (Other OTC: FNCTF - news) rose 7.2 percent after the company posted a positive profit outlook, while Deutsche Telekom (Xetra: DTE.DE - news) fell 4.6 percent after scrapping its forecast for free cash flow in 2015.

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