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* Pan-European STOXX 600 index gains 0.7 pct
* Banks biggest sectoral gainer led by Monte Paschi, Barclays
* Kering, Generali surge on well-received updates
By Atul Prakash and Danilo Masoni
LONDON/MILAN, July 29 (Reuters) - European shares rose on Friday helped by some encouraging company updates, with Kering gaining after its fashion brand Gucci recorded strong sales.
Financial services were in demand, with the STOXX Europe 600 Banks index topping sectoral gainers with a rise of 2.1 percent before the the release later in the day of the results of Europe-wide stress tests.
Italy's Monte dei Paschi di Siena, which is expected to be among banks that fare worst in the tests, rose 6.3 percent amid some optimim over a rescue plan that includes a 5 billion-euro capital increase.
"The key issue for market participants is whether investment banks will manage to guarantee the whole amount. Given a number of statements over the past few hours, it seems they will," LC Macro Chief Economist Lorenzo Codogno said.
A source close to the matter told Reuters on Friday that Monte dei Paschi was close to finalising a group of eight banks to guarantee the cash call.
Barclays rose 5.5 percent. Although the bank reported a 21 percent dip in first-half pre-tax profits, profits from its core businesses, including consumer and commercial lending, credit cards and investment banking, rose 19 percent to 2.4 billion pounds ($3.16 billion).
"The new boss, Jes Staley, seems determined to get on with the task of getting rid of the bad bank sooner rather than later," Hargreaves Lansdown senior analyst Laith Khalaf said.
"If and when Barclays gets rid of its non-core businesses, it should start to look more like an upstanding citizen of the banking sector."
UBS, the world's largest wealth manager, rose 0.5 percent after beating second-quarter profit estimates. But Switzerland's top bank cautioned that tough market conditions were likely to continue for the foreseeable future.
The pan-European STOXX 600 index rose 0.7 percent after closing nearly 1 percent lower the day before. The index ended with its third straight week of gains.
Several individual shares reacted sharply following their updates. Kering shares rose 6.2 percent after Gucci also beat forecasts with second-quarter organic sales growth of 7.4 percent, driven by demand for the brand's new looks designed by Alessandro Michele, particularly in Western Europe.
Italy's top insurer Generali reported a 10.5 percent drop in first-half operating profit but beat market expectations. Its shares rose 7.2 percent.
EDF rose 6.4 percent after it posted a first-half core profit that beat analyst expectations and its board approved the company's Hinkley Point nuclear project in Britain.
According to Thomson Reuters I/B/E/S data, 111 companies in the STOXX 600 have reported results so far. Of those, 42 percent have exceeded analyst estimates, against a long-term average of 49 percent. Overall earnings are expected to fall 11.3 percent in the quarter from the same period of 2015.
Among other movers, Pearson sank 9 percent after the world's biggest education company said first-half underlying sales fell more than expected, hurt by declines in assessment revenue in the United States and Britain.
Mid-cap British company Essentra slumped 22 percent, the top decliner in the STOXX 600 index, after reporting a 7 percent fall in its half yearly revenue. (Editing by Catherine Evans)