UPDATE 2-Cocktail of trade worries, poor data, Brexit hit European shares

* Trade gloom hits German manufacturing and services - PMI
* Brexit crisis, trade war worries weigh on risk sentiment
* Auto sector at three-month lows
* Merlin Entertainments up on shareholder activism

(Updates to close)
By Susan Mathew
May 23 (Reuters) - European shares sank on Thursday as the
latest round of U.S.-China trade friction and a soft set of
business surveys sapped investors' risk appetite, while pressure
on British Prime Minister Theresa to quit added to Brexit
concerns.
The pan-European STOXX 600 index .STOXX closed 1.4% lower,
with Germany's traditionally trade-sensitive DAX .GDAXI down
1.8%, while Italian shares .FTMIB slumped more than 2%.
As investors worried the U.S.-China trade feud was fast
turning into a technology-focused cold war, the latest evidence
of its impact on growth came from Germany. MKTS/GLOB
A survey on Thursday showed business morale in Germany
deteriorated more than expected in May as confidence in the
services sector worsened, suggesting Europe's largest economy is
losing steam.
"The key takeaway is that the engine of the eurozone
economy, Germany, may still be struggling," Marc C. Chandler,
chief market strategist at Bannockburn Global Forex wrote in a
note.
Euro zone business growth was also weaker than expected in
May, data showed.
Europe's auto .SXAP sector index, among the most exposed
to trade tensions, fell nearly 3% to an over three-month low,
while energy stocks .SXEP led losses with a 3.3% fall,
tracking oil prices lower. O/R
In Italy, the banks index .FTIT8300 has slipped 20% from
mid-April peak, confirming that the battered sector is in bear
market, amid renewed worries about a showdown between Rome and
Brussels over the euro-zone's No. 3 economy's budget.
London's blue-chip FTSE 100 .FTSE slumped 1.4% and its
exporter-heavy components shrugged off the benefit of a slide in
the pound to four-month lows on Brexit woes.
Prime Minister May clung to power on Thursday after her
final Brexit gambit backfired, overshadowing a European election
that has shown a United Kingdom still riven over its divorce
from the EU. "With both Brexit uncertainties and U.S.-China trade
tensions threatening to inflict more damage on the EU economy,
any post-election reprieve... would likely prove short-lived,"
said Jameel Ahmad, global head of currency strategy and market
research at online trading platform FXTM.
At the bottom of the STOXX 600 were shares of Royal Mail
RMG.L that hit record low as the threat of renationalisation
took its toll. Deutsche Bank DBKGn.DE also touched an all-time low. Its
chief executive promised "tough cutbacks" at its underperforming
investment bank as he battled to convince shareholders he can
turn around Germany's biggest lender. Shares of Daimler DAIGn.DE , Commerzbank CBKG.DE , trading
ex-dividend, were also down sharply.
At the other end, Merlin Entertainments MERL.L led gains
on the benchmark, up 7.5% after activist shareholder ValueAct
urged the Madame Tussauds owner to go private and said the
company could be valued about 20% more than its current price.