Utilities lead European shares higher, Italian banks rally

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* STOXX Europe 600 index up 0.2 pct

* Drax leads utilities firms higher

* Italian banks up 2.5 percent

By Atul Prakash

LONDON, Dec (Shanghai: 600875.SS - news) 6 (Reuters) - European shares extended gains on Tuesday, with the utilities sector leading the market higher after British power producer Drax Group Plc (Frankfurt: D9F2.F - news) announced it plans to buy an energy supplier and four gas power plant projects.

Among mid-caps, Britain's spreadbetting firms CMC Markets (LSE: CMCX.L - news) and IG (Frankfurt: A0EARV - news) both slumped about 30 percent after the UK's financial watchdog proposed stricter rules for "contract for difference" (CFD) products. (nL4N1E12RO]

The STOXX Europe 600 Utilities index climbed 2 percent higher, led by a 16 percent surge in Drax.

Jefferies analyst Oliver Salvesen said Drax's plan to buy energy supplier Opus Energy and the gas power plants would help it shift from its traditional commodity-exposed business towards a more diversified model, and expand its customer base.

"We see three key benefits from today's acquisition. Opus Energy looks like a well run retail business ... the deal increases the stability of Drax's earnings and cash flows going forward (and) there are also some opportunities for synergies related to Opus' current trading agreements," Salvesen said.

The pan-European STOXX Europe was up 0.2 percent by 0958 GMT after moving in and out of negative territory.

Italy's FTSE MIB rose 1.1 percent, after finishing down 0.2 percent on Monday following a 'no' vote in a referendum on constitutional reforms in the country. Italian banks rallied 2.5 percent on Tuesday to lift the index.

Italy's banking index fell hard early on Monday on worries that efforts to clean up bad debts and raise capital could be derailed after Italian Prime Minister Matteo Renzi said he would resign following the referendum defeat.

The rebound in Italian banking stocks came as some analysts dismissed the possibility of early elections, saying this would give Renzi's successor time to tackle the troubled banks.

"Banks are up because markets believe the restructuring of the sector and the capital increases will go through as planned," said Philippe Gijsels, head of research at BNP Paribas (LSE: 0HB5.L - news) Fortis (Dusseldorf: 12F.DU - news) in Brussels.

Banca Popolare Milano, Banco Popolare (Amsterdam: PB8.AS - news) and Mediobanca (Milan: MB.MI - news) rose 1.4 to 3 percent.

However Banca Monte dei Paschi (Milan: BMPS.MI - news) , which is looking to raise 5 billion euros ($5.4 billion) this month to avoid being wound down, fell 2.8 percent.

Gains in the broader European stock market were capped by a fall in commodities-related stocks.

The STOXX Europe 600 Basic Resources (Frankfurt: W8Z.F - news) index dropped 1.3 percent, the biggest sector faller, after prices of major industrial metals such as copper, aluminum and zinc fell 0.8 to 1.4 percent.

Energy shares also slipped, with the regional oil and gas index falling 0.7 percent after crude oil prices fell.

Shares (Berlin: DI6.BE - news) in Anglo American (LSE: AAL.L - news) , BHP Billiton (NYSE: BBL - news) , Rio Tinto and BP fell 0.8 to 3.4 percent.

(Editing by Richard Lough)