* FTSEurofirst 300 up 1.0 pct, bounces from Friday's dip
* Rebound led by German blue-chips (Adds Nationwide, updates prices)
By Blaise Robinson
PARIS, Aug 18 (Reuters) - European shares rallied on Monday as the threat of wider conflict in Ukraine, which had appeared to escalate on Friday, showed signs of easing.
In what may be a breakthrough in Ukraine's campaign against pro-Moscow separatists, government forces have raised their national flag over a police station in the city of Luhansk that was for months under rebel control.
Russia's Foreign Ministry said on Monday a "certain progress" was achieved during talks among Russia, Germany, France and Ukraine in Berlin on Sunday.
The upbeat sentiment on markets held fast despite the lack of an international settlement or a ceasefire.
At 1110 GMT, the FTSEurofirst 300 index of top European shares was up 1.0 percent at 1,336.28 points. Germany's DAX was up 1.4 percent.
German blue-chips - considered the most vulnerable to the tensions between the West and Russia - were among the top gainers on Monday. Continental AG, BASF and Siemens were up between 1.2 percent and 2.5 percent.
Autos stocks also brushed off the threat of possible retaliatory sanctions from Russia against Western nations, which according to Russian daily newspaper Vedomosti may include a ban on the imports of cars. The STOXX Europe 600 autos index was up 1.8 percent.
The pan-European index had lost 0.5 percent and Germany's DAX had dropped 1.4 percent on Friday, when reports that Ukrainian forces had destroyed a military column from Russia in Ukraine deepened fears the conflict was escalating.
"Friday's news spooked investors, but it turns out that there was no escalation involving Russian forces over the weekend and that rebel forces have actually been retreating, which helps the market reverse losses," Saxo Bank trader Pierre Martin said.
"Investors want to believe in this rebound that started early last week after a 10 percent correction, so we're seeing buyers of the dip."
There was some positive earnings news from Britain's biggest customer-owned lender, Nationwide Building Society, which more than doubled first-quarter profit.
The FTSEurofirst 300 had lost as much as 7.4 percent and Germany's DAX as much as 11 percent between late June and early August. The losses came amid fears that the Ukrainian conflict and tensions between the West and Moscow could derail Europe's fragile economic recovery and hit corporate results.
Stocks started to recover last week, however, with the FTSEurofirst gaining 1.4 percent over the week despite Friday's pull-back.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up
Editing by Alison Williams