Political strife in Rome knocks European shares

* FTSEurofirst 300 falls 0.7 percent

* FTSE MIB (Milan: FTSEMIB.MI - news) is biggest loser as Italian government teeters

* Investors also nervous over U.S. budget impasse

* European stocks still set for best quarter since 2011

By Alistair Smout

LONDON, Sept 30 (Reuters) - European shares fell on Monday, led lower by Italian shares after cabinet resignations in Rome risked triggering new elections while fiscal stalemate in the United States further soured the investor mood.

The pan-European FTSEurofirst 300 was down 0.7 percent at 1,245.59 at 1038 GMT, with every major country index in negative territory and tracking global equity markets spooked by deadlock in the U.S. Congress as its budget deadline neared.

The Italian blue-chip FTSE MIB fell 1.9 percent, the biggest percentage faller among major European bourses and suffering its worst session for six weeks after former premier Silvio Berlusconi's party withdrew its ministers from cabinet.

Despite those concerns, European shares remained near five-year highs and looked set for their best quarter in two years.

"The move by Mr Berlusconi's associates over the weekend definitely hasn't helped sentiment, and while we're seeing all stock markets down, it's the Italians that have been hit the hardest," David Jones, chief market strategist at IG (LSE: IGG.L - news) , said.

"Saying all of that, it's only a week or so ago that it made highs for the year, so it's not as bad as two or three years ago when we were really in the middle of crisis."

Italian stocks accounted for Europe's biggest movers. Lender Intesa Sanpaolo (Milan: ISP.MI - news) fell 4.3 percent, the top FTSEurofirst 300 faller, with traders citing the appointment of new CEO Carlo Messia as negative for the stock, potentially signalling more risky merger activity.

Telecom Italia (Milan: TIT.MI - news) was one of four top Italian stocks to rise, gaining 3.3 percent to top the Eurofirst leader board after reports that its CEO was set to resign on Thursday, allaying concerns over a possible capital increase, with the stock also benefiting from a JP Morgan (Other OTC: JPYYL - news) upgrade.

Chances that U.S. Republicans and Democrats could reach a deal on funding the government for the new fiscal year before midnight on Monday seemed slim. On Sunday, the Republican-controlled House of Representatives passed a measure tying government funding to a delay of a healthcare restructuring law, which Senate Democrats have vowed to reject.

Jitters over the political situation have taken the wind out of a recent equity rally after the U.S. Federal Reserve maintained its stimulus at the current pace, and EPFR fund flow data showed that Germany equity funds recorded their biggest weekly outflow since the second quarter of 2012.

But the FTSEurofirst remains near five-year highs, and is trading up 4 percent for September and up 8 percent since June, leaving it set for its best quarter since 2011.

"We believe that there is a strong fundamental case for European equities, driven by improving economic growth, high operational gearing and reasonable valuation," analysts at Goldman Sachs (NYSE: GS-PB - news) said in a note.