* FTSEurofirst 300 up 0.5 percent
* Draghi hints at QE, Euro zone banks gain
* Merck gains after Pfizer deal
* H&M boosted by forecast-beating sales
* Weir hit by renewed slump in crude (Updates with closing prices)
By Alistair Smout
EDINBURGH, Nov 17 (Reuters) - European shares turned solidly positive on Monday after ECB President Mario Draghi reasserted that he was ready to do more to fight deflation.
Shrugging off worries that Japan's economy has unexpectedly slipped into recession, the market also drew confidence from earnings reports, merger and acquisition news and appetite for more volatile stocks.
The FTSEurofirst 300 index of top European shares closed 0.5 percent higher at 1,352.01 points, extending gains after the European Central Bank President said unconventional measures could include the purchase of sovereign bonds.
Andrew Milligan, head of Global Strategy at Standard Life Investments, said ECB action could prompt a change in his "neutral" rating on European equities.
"If we feel the ECB is beginning to surprise the markets with more action, then we probably would look at rotating more into European equity," Milligan said.
"If we felt the ECB were falling further behind the curve, we may have to consider an "underweight" rating."
Euro zone banks extended gains after Draghi's comments, up 1.6 percent, with Unicredit and Banca Monte dei Paschi di Siena both up over 3 percent.
While Monte Paschi said at the weekend no bids had come in for the troubled lender, traders said that appetite for more volatile, or "high beta" stocks was building.
"Traders are betting on big swings in the most hammered European stocks such as (Monte Paschi)... The stocks have such big betas that it's an interesting trade in such a range-bound market," Saxo Bank trader Pierre Martin said.
Pharmaceutical firm Merck rose 3.2 percent after agreeing a deal with Pfizer for sharing rights to develop its experimental immunotherapy drug with the U.S. drugmaker.
Veolia also rose strongly, up 2.6 percent, with traders citing a discussion on CNBC on Sunday of new evidence that the earth's groundwater is being pumped out much faster than it can be replenished.
Traders said that this could increase the interest in companies with expertise in water management such as Veolia.
The moves helped to counteract sentiment dented by Japan's drop into recession, with the economy shrinking an annualised 1.6 percent in July-September following a 7.3 percent drop in the second quarter.
Analysts polled by Reuters had expected 2.1 percent growth in the third quarter.
Japan's data hit Brent crude, down more than $1 to near $78 a barrel, further pressuring shares in European oil majors and oil services groups.
Top faller was Weir Group, which dropped to a 2-1/2 year low. It was down 3.8 percent after a double-downgrade from Exane, who warn that the current oil price could trigger 25 pct reduction in rig count. (Additional reporting by Blaise Robinson; Editing by Ruth Pitchford)