By Sruthi Shankar and Medha Singh
(Reuters) - European shares ended flat on Monday as a summer lull hit trading volumes at the start of a pivotal week that will see the European Central Bank meet over monetary policy and a deluge of corporate earnings reports.
The pan-European STOXX 600 index <.STOXX> closed up just 0.07%, with just 151.5 million shares changing hands at the close versus its thirty-day average of 1.8 billion.
However, an index of euro zone stocks <.STOXXE> closed 0.22% higher as Italian shares <.FTMIB> recovered some ground after political uncertainty drove their worst day in two months on Friday. Investors are gearing up for a showdown between Italy's coalition partners this week that could raise uncertainty about the future of the government.
"Equity markets have fallen slightly in the past few days, more so in Italy than others, but in most cases they are still close to record highs. They are not particularly well-positioned for a negative event," said Simona Gambarini, a markets economist at Capital Economics in London.
Investors are focussed on the ECB meet on Thursday, with money markets pricing in a more than 50% chance of a 10 basis point cut in interest rates and bond investors expecting at least a clear promise of action in September to counter slowing growth.
That meeting and next week's U.S. Federal Reserve' statement are likely to determine whether a rebound in shares since the worst falls in more than two years in May will continue or stall.
The main STOXX index hit a session high in afternoon trading following a South China Morning Post report that U.S. trade negotiators could visit China next week for their first face-to-face talks with Chinese officials since the G20 meeting last month.
Trade-exposed sectors such as technology <.SX8P> and automakers <.SXAP> rose, with chipmakers Infineon Technologies
Spanish banks were a weak spot ahead of earnings from the euro zone's biggest bank by market value, Banco Santander
Spain's acting Prime Minister Pedro Sanchez signaled on Monday that his Socialist party was close to forming a government with far-left Podemos, which would pave the way for him to be sworn in by parliament.
The first confirmation vote is scheduled for around 1800 (1600 GMT) on Tuesday, almost three months after an inconclusive national election left the Socialists as the biggest party but short of a majority.
"His alliance with Podemos to form a very leftist government, probably concern a lot of investors, particularly if they're close to market-sensitive ministries such as treasury, finance, labor, housing, etc," a trader in Spain said.
The biggest gainer on the STOXX index was Dutch health technology firm Koninklijke Philips NV
Energy shares <.SXEP> were again among the top gainers, tracking a rise in crude prices due to tensions in the Middle East and propping up London's commodity-heavy blue chip index <.FTSE> [O/R] [.L]
Shares of British fashion retailer
(Additional reporting by Danilo Masoni in Milan; Editing by Frances Kerry)
