UPDATE 2-European stocks rise, shaking off pressure from Italy's banks

* STOXX 600 rises 0.4%; up for third day running
* Italian stocks hit on concerns about country's debt
* Norsk Hydro shares rise on quarterly earnings beat

(Recasts, updates to close, adds quote)
By Aaron Saldanha
June 5 (Reuters) - European stock markets crept higher on
Wednesday as defensive shares gained ground, but rising tensions
between Italy and the European Commission over the country's
debt dampened sentiment.
The caution in Europe made the region an outlier, as U.S.
Federal Reserve Chairman Jerome Powell's accommodative comments
late on Tuesday and weaker-than-expected U.S. data on Wednesday
supported assets globally. MKTS/GLOB .N
The European Commission said Italy was in breach of EU
fiscal rules due to its growing debt and this justified a
disciplinary procedure, a position that firmly capped regional
risk appetite. Italian Deputy Prime Minister Luigi Di Maio complained that
Brussels had treated Rome unfairly, but said he wanted
constructive talks with the commission.
The STOXX 600 index .STOXX gained 0.4%, rising for a third
straight day. Germany's DAX .GDAXI and London-traded stocks
.FTSE edged up 0.1%, while Italian equities shed 0.4%.
While Europe's lenders .SX7P fell 0.5%, Milan-traded banks
.FTIT8300 dropped 1.6%. UniCredit CRDI.MI slid 3.5%, while
Banco BPM BAMI.MI declined 2.2%.
Redburn Financials Analyst Russell Quelch said the
announcement of the commission's upcoming procedure "didn't come
as a shock" but is sure to widen yield spreads between Italian
and German bonds, "which matters for banks given their large
sovereign bond portfolios."
"I would expect today's news to be another dent to the
investment case for Italian banks, while higher spreads may
ultimately be passed onto consumers through higher rates, the
impact is immediately felt through capital as we saw in Q3
2018."
Berenberg trimmed its price target on Madrid-listed
Caixabank CABK.MC , its shares fell 3.5%.
Utilities .SX6P and real estate stocks .SX86P rose late
in the day, especially after Di Maio's comments, tacking on 1.4%
and 1.1%, respectively. Investors often take refuge in those
sectors at times of market uncertainty.
Industrial goods and services stocks .SXNP rose 0.7%,
aided by Dassault Aviation AVMD.PA surging 5% after Goldman
Sachs upgraded the aviation firm's stock to "Buy", citing
capital flexibility and an inexpensive valuation. Basic resources firms .SXPP fell 1%, with losses partially
cushioned by Norsk Hydro ASA's NHY.OL 0.9% rise. The
Oslo-listed firm's quarterly underlying operating earnings beat
expectations, although it said a cyber attack in March would
cost it between NOK 300 million ($34.39 million) and NOK 350
million ($40.13 million). = 8.7226 Norwegian crowns)