Cocktail of trade worries, poor data, Brexit hit European shares

* Trade gloom hits German manufacturing and services - PMI

* Brexit crisis, trade war worries weigh on risk sentiment

* Auto sector at three-month lows

* Merlin Entertainments up on shareholder activism (Updates to close)

By Susan Mathew

May 23 (Reuters) - European shares sank on Thursday as the latest round of U.S.-China trade friction and a soft set of business surveys sapped investors' risk appetite, while pressure on British Prime Minister Theresa to quit added to Brexit concerns.

The pan-European STOXX 600 index closed 1.4% lower, with Germany's traditionally trade-sensitive DAX down 1.8%, while Italian shares slumped more than 2%.

As investors worried the U.S.-China trade feud was fast turning into a technology-focused cold war, the latest evidence of its impact on growth came from Germany.

A survey on Thursday showed business morale in Germany deteriorated more than expected in May as confidence in the services sector worsened, suggesting Europe's largest economy is losing steam.

"The key takeaway is that the engine of the eurozone economy, Germany, may still be struggling," Marc C. Chandler, chief market strategist at Bannockburn Global Forex wrote in a note.

Euro zone business growth was also weaker than expected in May, data showed.

Europe's auto sector index, among the most exposed to trade tensions, fell nearly 3% to an over three-month low, while energy stocks led losses with a 3.3% fall, tracking oil prices lower.

In Italy, the banks index has slipped 20% from mid-April peak, confirming that the battered sector is in bear market, amid renewed worries about a showdown between Rome and Brussels over the euro-zone's No. 3 economy's budget.

London's blue-chip FTSE 100 slumped 1.4% and its exporter-heavy components shrugged off the benefit of a slide in the pound to four-month lows on Brexit woes.

Prime Minister May clung to power on Thursday after her final Brexit gambit backfired, overshadowing a European election that has shown a United Kingdom still riven over its divorce from the EU.

"With both Brexit uncertainties and U.S.-China trade tensions threatening to inflict more damage on the EU economy, any post-election reprieve... would likely prove short-lived," said Jameel Ahmad, global head of currency strategy and market research at online trading platform FXTM.

At the bottom of the STOXX 600 were shares of Royal Mail that hit record low as the threat of renationalisation took its toll.

Deutsche Bank also touched an all-time low. Its chief executive promised "tough cutbacks" at its underperforming investment bank as he battled to convince shareholders he can turn around Germany's biggest lender.

Shares of Daimler, Commerzbank, trading ex-dividend, were also down sharply.

At the other end, Merlin Entertainments led gains on the benchmark, up 7.5% after activist shareholder ValueAct urged the Madame Tussauds owner to go private and said the company could be valued about 20% more than its current price. (Reporting by Medha Singh, Agamoni Ghosh and Susan Mathew in Bengaluru; Editing by Andrew Cawthorne)