UPDATE 2-European shares steady as trade tensions ease; Italy outperforms

* Trump says China wants to return to negotiating table
* Italian stocks up 1% as government deal edges closer
* German real estate stocks hit by Berlin rent cap
* London markets shut for public holiday

(Recasts, adds fresh comment, updates to close)
By Agamoni Ghosh
Aug 26 (Reuters) - European shares stabilised on Monday as
trade tensions between the United States and China eased
somewhat while potential for a coalition arrangement to form a
new government in Rome thrust Italian stocks higher.
The pan-European STOXX 600 index .STOXX ended flat,
clawing back ground after a Friday sell-off ignited by yet
another tit-for-tat round of tariffs between the world's two
largest economies.
Trading volumes were thinned out by a UK holiday .FTSE .
European equity markets were almost certain to follow their
Asian counterparts into deep losses but recovered after U.S.
President Donald Trump said Beijing had contacted Washington to
say it wanted to return to the negotiating table. The change in tone came after China said it was willing to
resolve the trade dispute with U.S. through "calm" negotiation.
Trade-sensitive auto stocks .SXAP led gains on the
benchmark, having fallen 2% in the previous session after China
announced fresh tariffs on certain U.S. goods.
"We are expecting a trade deal between China and U.S.
towards the end of the year, but that further escalation was in
our scenario," said ING economist Timme Spakman.
On one hand it would inflict more pain on China and increase
willingness to make a deal, though Trump will also be in need of
a deal ahead of U.S. elections, Spakman added.
In the meantime, sentiment remains jittery. Munich-based Ifo
institute said its business climate index fell to the lowest
level since November 2012, a further sign of the expected damage
to the Garman economy, Europe's largest, from the U.S.-China
trade conflict. In corporate news, German real estate stocks came under
pressure after a report that Berlin's city government plans to
cap rents. Shares in Deutsche Wohnen DWNG.DE slid nearly 3%.
European stocks have swung wildly in August over worries
that the U.S.-China trade war will eventually tip the global
economy into recession, setting the STOXX 600 on course to end
August lower.

ITALY UPLIFT
Italian markets outperformed, with Milan's FTSE MIB .FTMIB
closing 1% higher as the opposition Democratic Party (PD) and
the anti-establishment 5-Star Movement moved closer to a deal on
forming a coalition government. The sticking point lingering between the two traditionally
antagonistic parties is whether or not caretaker prime minister
Giuseppe Conte stays in his job to lead a new alliance.
"With all major players of the centre-left apparently eager
to avoid snap elections, chances are that the distribution of
top jobs can eventually be resolved," said Berenberg economist
Holger Schmieding.
If they fail to come an agreement, Eurozone'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 plans.