UPDATE 2-Italian rally thrusts European shares higher; FTSE 100 lags

* Italian stocks rally on hopes of avoiding snap elections
* Dublin jumps on smoother Brexit hopes, FTSE lags
* Beijing auto stimulus lifts auto stocks

(Recasts, changes comment, updates to close)
By Agamoni Ghosh
Aug 27 (Reuters) - European shares rose comfortably on
Tuesday led by Italian stocks on hopes of an arrangement to form
a new coalition government in Rome, while Beijing's pledge to
boost car sales triggered gains in auto-makers exposed to
Chinese markets.
Milan's blue-chip index .FTMIB ended 1.5% higher, far
outperforming its regional peers as the 5-Star Movement and the
opposition Democratic Party (PD) appeared on the verge of a deal
to form a new government at the centre.
While differences persisted between the two traditionally
antagonistic parties over cabinet posts, there remained a high
possibility that Giuseppe Conte could return as Prime Minister.
"Italy has an edge over its peers today because there is
hope that the coalition will be formed and hence the country can
avoid a snap election," said Connor Campbell, financial analyst
at Spreadex in London.
If talks however, fail, the euro zone's third-largest
economy could be staring at months of political uncertainty at a
time when it is facing economic stagnation, a mounting fiscal
deficit and potential conflict with the European Union over its
budget.
The pan-European STOXX 600 index .STOXX ended 0.6% higher,
reversing losses from the morning led by defensive utilities
.SX6P and auto stocks .SXAP .
News that China's State Council was considering relaxing and
removing restrictions on auto purchases came as a welcome move
for both car-makers as well as the broader markets that is
reeling from the damaging effects of the protracted trade spat.
"That's (China stimulus) promising of course, but any
hoped-for benefit won't offset damage already done to Europe's
export-underpinned economy by trade disputes and other
long-standing pressures," said Ken Odeluga, markets analyst at
City Index.
The final estimate of Germany's GDP data for the
second-quarter confirmed on Tuesday that Europe's largest
economy contracted by 0.1% and that weak exports were the main
reason for the shrinkage. Worries that the trade dispute may tip major economies into
recession has put European equities on pace to end August nearly
4% lower, but hopes that central banks may step in to provide
stimulus has limit losses.
London's FTSE 100 .FTSE lagged its peers, down 0.1% as the
British pound rose to a near one-month high after opposition
parties vowed to try and pass a law to prevent a no-deal Brexit
at the end of October. .L
Dublin's ISEQ index .ISEQ , typically sensitive to Brexit
news, jumped on the developments, closing 1.5% higher.
In a rather quiet day for company news, Swedish leisure
products supplier Dometic DOMETIC.ST slid 7% to land at the
bottom of the STOXX 600 on the latest downward trend in U.S.
leisure vehicle shipments.