* Government's defeat in local election hit Spanish stocks
* Ryanair's shares rise after airline's profits surge
* Europe bourses in 2015: link.reuters.com/pap87v
* Asset performance in 2015: link.reuters.com/gap87v
By Sudip Kar-Gupta
LONDON, May 26 (Reuters) - European stock markets stumbled on Tuesday as Greece's debt problems and a battering for Spain's government in local elections offset a rise in airline shares.
The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX 50 index both fell 0.3-0.4 percent. The FTSEurofirst remains up nearly 20 percent since the start of 2015.
Irish airline Ryanair surged 6.3 percent after posting higher profits. Its rival Aer Lingus also rose after Ireland's prime minister said the government would discuss the sale of its stake in the airline.
However, Spanish banking stocks underperformed.
Popular, Sabadell and Caixabank all fell after Spain's ruling PP party suffered its worst defeat in over 20 years in local elections, reflecting voter discontent at four years of austerity.
Although the weekend's election result had already hit Spanish stocks, trading had been thin elsewhere on Monday with markets in London, Frankfurt and New York shut for public holidays.
Spain's benchmark IBEX equity index retreated a further 0.2 percent on Tuesday, suffering its worst two-day fall in around five weeks.
Greece's main ATG equity index recovered from a 3.1 percent fall on Monday to stand 1.2 percent higher, but the index has made zero gains since the start of 2015, underperforming rallies on other European stock markets.
Greece must repay four loans totalling 1.6 billion euros ($1.76 billion) to the International Monetary Fund next month, starting with a 300 million euro payment on June 5.
If no deal is reached with the EU/IMF for new loans to be disbursed to Athens, Greece is likely to default on the IMF loan repayment. This would start a process that could lead Greece out of the euro zone.
Most investors expect Greece to remain inside it, and record low interest rates and other economic stimulus measures from the European Central Bank have enabled European stock markets to rally this year, despite the Greek uncertainty.
Nevertheless, traders said the latest developments from Athens and Madrid made some investors wary.
"We are a bit in no-man's land at the moment," said Mirabaud Securities' senior equity sales trader John Plassard.
Shares in telecoms group Altice fell after bid rival Charter Communications neared an agreement to buy Time Warner, people familiar with the matter said.
Monte dei Paschi di Siena also slumped following the Italian bank's 3-billion euro cash call.
Today's European research round-up (Additional reporting by Lionel Laurent; Editing by Mark Heinrich)