Trade, Italy hopes lift European stocks to best day in 8 months

* Euro zone stocks rise 1.8 pct

* Trump sounds upbeat on trade deal

* Deutsche Bank (IOB: 0H7D.IL - news) rallies on merger talk

* Hopes of budget deal lifts Italian stocks

* Pernod hits record high after activist move (Writes through, adds details, closing prices)

By Danilo Masoni and Julien Ponthus

MILAN/LONDON, Dec (Shanghai: 600875.SS - news) 12 (Reuters) - European shares rallied on Wednesday after U.S. President Donald Trump sounded upbeat about a trade deal with China and optimism grew that Italy could reach a compromise with the European Commission over its disputed 2019 budget.

A report rekindling talk about a possible merger involving Deutsche Bank helped the euro zone stock benchmark to rise by 1.8 percent, its biggest one-day gain since April.

The index is down 11.5 percent year-to-date, having touched its lowest level in 2 years earlier this month, dragged lower by signs that global economic growth is slowing and worries over political stability in Europe.

Trump said late on Tuesday that trade talks with China were progressing with discussions underway by telephone and more meetings likely among officials of both countries. Benefiting from the optimism over trade were sectors such as materials, autos and tech, which all rose more than 2 percent.

"Hopes of a resolution to the US-China trade dispute appear brighter," Vincent-Frédéric Mivelaz, a market analyst at Swissquote Bank in Geneva, said.

Elsewhere, Britain's top FTSE 100 share index rose 1.1 percent on bets that Prime Minister Theresa May would survive a leadership challenge.

"Even (Taiwan OTC: 6436.TWO - news) though there's tremendous uncertainty... we don't expect anyone will want to take responsibility for a hard Brexit and we think the worst-case scenario can be avoided," said Giuseppe Sersale, fund manager at Anthilia Capital.

Euro zone banks gained 2.9 percent with Deutsche Bank rising 5.8 percent after a Bloomberg report said Germany was holding high-level talks to facilitate a possible merger with Commerzbank (Xetra: CBK100 - news) .

Commerzbank shares rose 5.6 percent.

Italian banks added 3 percent, led by Intesa Sanpaolo (Amsterdam: IO6.AS - news) , the country's top retail lender, as Prime Minister Giuseppe Conte flew to Brussels for talks on the draft budget.

Cabinet undersecretary Giancarlo Giorgetti said Italy hoped it could reach a deal by agreeing to a deficit of between 2.0-2.2 percent of gross domestic product from 2.4 percent.

"The possibility that there could be an agreement on the 2 percent is bringing relief to Italian markets, both bonds and bank stocks which are trading at very depressed levels," said Roberto Lottici, fund manager at Banca Ifigest.

Banks in the euro zone found further support after Spanish lender Unicaja and Liberbank (Madrid: 21414994.MA - news) confirmed they had held talks about a potential deal, driving shares 15.9 and 13.9 percent respectively.

Elsewhere, Pernod Ricard (TLO: RI-U.TI - news) rose 5.9 percent to a fresh record high after news that activist investor Elliott Management had built up a stake in the family-backed French drinks company in a bid to boost profit margins and improve returns for investors.

"There is potential for Pernod Ricard to be more efficient. However current management have been squeezing the cost base for several years and in our view need no encouragement to continue," Bernstein analyst Trevor Stirling said.

Among the few losers were shares of Zara owner Inditex (Amsterdam: IT6.AS - news) , which fell 4.5 percent after sales and profit growth missed market expectations, while a downbeat broker note sent Pandora (LSE: 0NQC.L - news) 11.5 percent lower. (Reporting by Danilo Masoni; Editing by Alexander Smith)