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* Euro STOXX 50 index up 0.1 pct
* German shares outperform after factory data
* Italian banks lower after govt bad debt measures
* Allianz rises after results
By Danilo Masoni and Atul Prakash
MILAN/LONDON, May 2 (Reuters) - European shares edged up on Monday after sharp declines in the previous session, with German shares outperforming the broader market after a positive manufacturing survey.
However, Italian banks fell after the latest government measures aimed at tackling the sector's pile of bad loans fell short of expectations.
Trading volumes were thin as the UK market and other bourses in Europe were closed for a public holiday.
The euro zone's blue-chip Euro STOXX 50 index ended up 0.1 percent. Germany's DAX rose 0.8 percent after data showed factory activity in Europe's biggest economy rose to a three-month high in April, buoyed by rising demand at home and abroad.
"It's a pleasant surprise, but I still think that we are not out of the woods yet," said Koen De Leus, senior economist at KBC in Brussels. "We don't see a big acceleration in German growth trends because an appreciation in the euro against the dollar and a recent recovery in oil prices will continue to be major headwinds."
Insurers were the biggest sectoral gainer, led higher by Germany's Allianz, which rose 2.9 percent after its net profit rose due to one-off effects, outperforming expectations.
Milan's blue chip FTSE MIB index fell 0.9 percent, however, with banks UniCredit, Monte dei Paschi and Banco Popolare all down between 3.7 and 7.3 percent.
The Italian government passed a decree late on Friday to speed up the recovery of loans in a bid to help banks tackle a bad loan pile and restore confidence in the battered sector. But investors on Monday expressed some caution about the measures and said it would take time their impact was seen.
"The new measure seems interesting but the market will need more clarity on how quickly the new initiatives will feed into the economy and how many of the existing lending contracts will be amended to include them," Citi said in a note to clients.
Luxury carmaker Ferrari fell 0.8 percent after a strong earnings release which traders said had already been priced in.
BASF fell 2.9 percent after its shares traded without the attraction of latest dividend payouts.
On Friday, the pan-European FTSEurofirst 300 had fallen 2.2 percent, with the index still down more than 6 percent this year.
Investors will keep an eye on earnings for hints about the market's near-term direction. The reporting season is gathering pace, with 65 firms in the STOXX 600 index, including Lloyds, Royal Bank of Scotland, Shell and Continental, reporting their results this week.
According to Thomson Reuters StarMine, 43 percent companies in Europe have reported results, of which 62 percent have met or beaten earnings forecasts.
Today's European research round-up
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Mike Dolan, Markets Editor EMEA. (Additional reporting by Valentina Za in Milan; Editing by Robin Pomeroy)