* Pan-European FTSEurofirst 300 gains for 2nd day
* Monte dei Paschi surges on report of rescue plan
* Automobile stocks gain on positive Kepler note
By Sudip Kar-Gupta
LONDON, March 14 (Reuters) - European equities extended gains on Monday following funding plans from the ECB for the region's lenders, with autos gaining on the sector's positive outlook and Italian banks rising on the prospect of a possible rescue deal.
The pan-European FTSEurofirst 300 index, which had climbed 2.7 percent on Friday, was up 0.8 percent by midday, while the euro zone's blue-chip Euro STOXX 50 index advanced 0.9 percent.
Germany's DAX rose 1.5 percent after briefly climbing back over the 10,000 points mark - a key level for many technical traders - for the first time since January.
On the sector level, the STOXX Europe 600 Automobiles and Parts index topped the leaderboard and was up 1.6 percent following a positive note from Kepler Cheuvreux, which upgraded its stance on companies such as Daimler, Peugeot, BMW and Continental.
"Demand so far this year has been better than expected in Europe, while volumes in the U.S. and China continue to hold up well. FY 2015 results have also been strong overall, resulting in positive relative earnings momentum for the sector and taking valuation multiples down sharply," they said.
The euro zone banking index was up nearly 1 percent, with analysts saying that banks in the so-called "peripheral" nations of Italy, Spain and Portugal were continuing to rally on the ECB's plans for a new round of cheap funding for the sector.
"We believe there is enough value in the sector for continued performance on central bank stimulus - with peripheral banks likely to lead the way," RBC analyst Robert Noble said.
Italian bank Monte dei Paschi di Siena rose 8 percent, with traders citing speculation that state holding Cassa Depositi e Prestiti (CDP) might intervene in a government-sponsored rescue of the troubled Italian bank. Shares in Carige rose 6 percent, while Banco Popolare gained 3.7 percent.
In spite of the rebound from the end of last week, the FTSEurofirst remains down by around 5 percent since the start of 2016, with world stock markets having been impacted by concerns about a global economic slowdown.
Some investors and strategists, such as Wall Street bank Morgan Stanley, remained cautious.
The euro zone's uncertain political and economic backdrop was also highlighted by a defeat for German Chancellor Angela Merkel in regional elections over the weekend.
"Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities, and to moderate our EU credit weight after the sharp ECB driven rally," said Morgan Stanley's strategists. (Additional reporting by Atul Prakash; Editing by Toby Chopra)