UPDATE 1-European shares rise as Italy recovers and China tariff cut boosts autos

* STOXX 600 up 0.2 pct

* Autos drive gains after China announces tariff cut

* UBS upgrade to “buy” boosts Georg Fischer

* Italy’s FTSE MIB, banks rise as govt formation stalls

* French telecoms climb on new M&A hopes (Updates prices, adds quotes, details)

By Helen Reid

LONDON, May 22 (Reuters) – European shares touched their highest level since the start of February on Tuesday as autos and bank stocks climbed, and Italian shares recovered as the anti-establishment coalition’s government formation process stalled.

The pan-European STOXX 600 rose 0.2 percent, extending Monday’s gains as carmakers rose on a cut to Chinese tariffs. Italy’s FTSE MIB gained 0.7 percent.

Volkswagen, BMW and Daimler were among the biggest boosts to the STOXX, up 1 to 1.6 percent, after China said it would cut the import duty on passenger cars and auto parts from July 1.

Europe’s autos sector climbed 0.7 percent and Italy’s Fiat Chrysler also rose 1.3 percent, helping the Italian index gain 0.6 percent.

Italian bank stocks recovered as the anti-establishment 5Star and League parties’ government plans stalled. President Sergio Mattarella sought further consultations over their proposed prime minister, a political novice.

Some investors were doubtful a coalition government would be able to go ahead with their big spending plans that have spooked markets, sending Italian bond yields to their highest in more than a year.

“I don’t know how long this coalition will last. There’s an awful lot of negativity around it but I would be surprised if the coalition can go any meaningful distance,” said Christopher Peel, chief investment officer at Tavistock Wealth.

“Certainly Italy is a problem but geopolitical tension seems actually lower now than I can remember in a long time,” he added.

Competitive pressures, and hopes of dealmaking, triggered strong single-stock and sector-wide moves.

Inmarsat shares dropped 8.4 percent to the bottom of the STOXX after the International Maritime Organisation authorised competitor Iridium to provide maritime safety systems, threatening Inmarsat’s monopoly in maritime distress communications.

French telecoms stocks Bouygues, Orange and Iliad all rose after the head of the country’s telecoms regulator reignited talk of possible mergers in the sector, in comments to Le Monde newspaper.

Altice shares also rose on investors’ hopes for M&A, and as the stock readjusted to the separation of Altice USA from Altice NV. The telecoms sector rose 0.8 percent overall.

Banks HSBC, Santander, BNP Paribas and UBS were also among top drivers, benefiting from the recent rise in bond yields.

Swiss industrial machinery firm Georg Fischer jumped 7.7 percent after UBS upgraded the stock to a “buy”, saying the market is underestimating the company’s margins and earnings potential, helped by its diversification in different industrial products.

Overall Europe’s earnings performance has been relatively disappointing, particularly compared with a stellar quarter in the U.S.. Bank of America Merrill Lynch said the ratio of STOXX 600 companies beating earnings targets this quarter was the worst since 2013.

“Year-to-date a lot of people have been overweight European equities and that’s been a frustrating trade, but the recent pullback in the euro is going to help because the strong appreciation was hurting exports,” said Tavistock’s Peel. (Reporting by Helen Reid Editing by Kit Rees and Andrew Heavens)

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UPDATE 1-UK Stocks-Factors to watch on May 22

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