UPDATE 2-European shares notch best first-half gain in two decades

* German stocks outperform European peers
* Deutsche Bank gains after passing Fed stress test
* Merlin Entertainments soars after buyout offer

(Updates to close)
By Sruthi Shankar and Amy Caren Daniel
June 28 (Reuters) - A surge in German shares helped European
equities mark their best first-half performance in over two
decades on Friday, with investors awaiting the outcome of
U.S-China trade talks to see if the rally can continue.
The pan-European STOXX 600 .STOXX closed up 0.7%, with
Frankfurt's trade-sensitive DAX .GDAXI outperforming other
major indexes with a 1% rise, aided by top lender Deutsche Bank
AG DBKGn.DE .
The bank's shares rose 3.3% after it passed an annual health
check by the U.S. Federal Reserve. Gains on the main STOXX index were broad-based, with sectors
exposed to trade tensions, such as technology and automakers,
climbing.
Investors are looking ahead to talks between U.S. President
Donald Trump and Chinese President Xi Jinping over their
long-drawn trade dispute at the sidelines of the G20 summit on
Saturday. Trump said he hoped for productive talks with China,
but said he had not made any promises about a reprieve from
escalating tariffs. While most investors do not see both sides striking a trade
deal, Trump is expected to hold off from imposing new tariffs on
Chinese goods.
"The market is still hoping that there might be a positive
communication after the meet," said Rabobank strategist Bas Van
Geffen.
The STOXX index enjoyed its best first half yearly gains
since 1998 on Friday, rising 14.5%, on expectations that major
central banks would be more accommodative to counter the impact
of the tariff dispute.
"What we see with this positive first half of the year is
when the Fed started turning around. And if you actually see the
Fed follow through this, you might see the momentum more or less
intact," said Geffen.
Also on investors' radar is a standoff between Switzerland
and the European Commission over a stalled partnership treaty,
with the Swiss government triggering measures to counter
Brussels' refusal to extend recognition to Swiss stock markets.
Starting on July 1, the Swiss will forbid European Union
trading venues from offering or facilitating trading in certain
shares of companies with a registered office in Switzerland.
Swiss stock index .SSMI shrugged off the news to rise
0.4%. Bourses in Paris .FCHI , Madrid .IBEX and .FTMIB
posted gains between 0.6% and 0.9%, while London-listed stocks
lagged with a 0.3% rise as energy stocks fell.
Travel and leisure stocks .SXTP led gains on the main
STOXX index, with a 1.6% rise after shares of Madame Tussauds
owner Merlin Entertainments MERL.L jumped 14%.
Merlin said it would be acquired by Lego's founding family
and private equity firm Blackstone Group BX.N in a deal
valuing the company and its debt at nearly 6 billion pounds
($7.6 billion).