By Helen Reid
LONDON (Reuters) - European shares touched their highest level since the start of February on Tuesday as autos and bank stocks climbed, and Italian shares recovered as the anti-establishment coalition's government formation process stalled.
The pan-European STOXX 600 (STOXX) rose 0.2 percent, extending Monday's gains as carmakers rose on a cut to Chinese tariffs. Italy's FTSE MIB (FTMIB) gained 0.7 percent.
Volkswagen (DE:VOWG_p), BMW (DE:BMWG) and Daimler (DE:DAIGn) were among the biggest boosts to the STOXX, up 1 to 1.6 percent, after China said it would cut the import duty on passenger cars and auto parts from July 1.
Europe's autos sector (SXAP) climbed 0.7 percent and Italy's Fiat Chrysler (MI:FCHA) also rose 1.3 percent, helping the Italian index gain 0.6 percent.
Italian bank stocks (FTIT8300) recovered as the anti-establishment 5Star and League parties' government plans stalled. President Sergio Mattarella sought further consultations over their proposed prime minister, a political novice. [nL5N1SS1DE]
Some investors were doubtful a coalition government would be able to go ahead with their big spending plans that have spooked markets, sending Italian bond yields to their highest in more than a year.
"I don't know how long this coalition will last. There's an awful lot of negativity around it but I would be surprised if the coalition can go any meaningful distance," said Christopher Peel, chief investment officer at Tavistock Wealth.
"Certainly Italy is a problem but geopolitical tension seems actually lower now than I can remember in a long time," he added.
Competitive pressures, and hopes of dealmaking, triggered strong single-stock and sector-wide moves.
Inmarsat (L:ISA) shares dropped 8.4 percent to the bottom of the STOXX after the International Maritime Organisation authorised competitor Iridium (O:IRDM) to provide maritime safety systems, threatening Inmarsat's monopoly in maritime distress communications.
French telecoms stocks Bouygues (PA:BOUY), Orange (PA:ORAN) and Iliad (PA:ILD) all rose after the head of the country's telecoms regulator reignited talk of possible mergers in the sector, in comments to Le Monde newspaper.
Altice (AS:ATCA) shares also rose on investors' hopes for M&A, and as the stock readjusted to the separation of Altice USA from Altice NV . The telecoms sector rose 0.8 percent overall.
Banks HSBC (L:HSBA), Santander (MC:SAN), BNP Paribas (PA:BNPP) and UBS (S:UBSG) were also among top drivers, benefiting from the recent rise in bond yields.
Swiss industrial machinery firm Georg Fischer (S:FIN) jumped 7.7 percent after UBS upgraded the stock to a "buy", saying the market is underestimating the company's margins and earnings potential, helped by its diversification in different industrial products.
Overall Europe's earnings performance has been relatively disappointing, particularly compared with a stellar quarter in the U.S.. Bank of America (NYSE:BAC) Merrill Lynch said the ratio of STOXX 600 companies beating earnings targets this quarter was the worst since 2013.
"Year-to-date a lot of people have been overweight European equities and that's been a frustrating trade, but the recent pullback in the euro is going to help because the strong appreciation was hurting exports," said Tavistock's Peel.