By Kit Rees
LONDON (Reuters) - European shares breathed a sigh of relief on Friday with Italian stocks leading the pack after a coalition deal appeared to end three months of political deadlock.
The pan-European STOXX 600 (STOXX) index rose 0.8 percent, while German stocks (GDAXI) gained 0.9 percent and Britain's FTSE 100 (FTSE) rose 0.6 percent.
Italian stocks (FTMIB) rallied 2.7 percent, the standout performers in Europe as Italian banks (FTIT8300) gained 4.7 percent. Recent political uncertainty has roiled Italian stocks, resulting in a slide of more than 9 percent for the Italian benchmark in May, its worst month since June 2016.
However, Italy's anti-establishment parties revived coalition plans on Thursday, removing the risk of a repeat vote.
Shares in Italian banks Banco BPM (MI:BAMI), BPER (MI:EMII), UBI (MI:UBI) and Intesa Sanpaolo (MI:ISP) were among the biggest risers on the STOXX, up between 4.9 percent to 7.5 percent after sustaining heavy losses in the previous month.
However, some market watchers remained cautious given that Italy's anti-establishment parties, the League and 5-Star, are planning to spend big.
"Pending better visibility on the new government's actions, Italian assets may continue to price in some policy uncertainty," Matteo Ramenghi, chief investment officer UBS WM Italy, said in a note.
Elsewhere Spanish equities (IBEX) rose 1.4 percent, shrugging off any jitters as a no confidence motion in Prime Minister Mariano Rajoy was set to be voted.
Away from politics, semiconductor stocks were a weak spot after shares in Dialog Semiconductor (DE:DLGS) plunged 15 percent. The chipmaker said that Apple (NASDAQ:AAPL) was planning on cutting smartphone power chip orders, which will shave 5 percent off Dialog's 2018 revenues.
Peer AMS (S:AMS) declined before recovering losses to trade flat.
"Becoming more positive for the investment case remains difficult due to the uncertainty related to the company’s Apple business," analysts at Baader Helvea said in a note.
Dialog's shares have slumped nearly 40 percent so far in 2018, following a loss of 35 percent in 2017.
Elsewhere shares in Deutsche Bank (DE:DBKGn) recovered some of the previous session's heavy losses, climbing 3.6 percent higher following Thursday's drop of more than 7 percent in the after a report that the U.S. Federal Reserve last year designated the bank's U.S. operations to be in "troubled condition".
On Thursday, S&P downgraded Deutsche Bank's credit rating to BBB+ from A-.
